Trade Patterns and the Future of I nternational Air Cargo FW S I ATA Speech March 1 1 , 2 0 1 4 ( slide 1 – title slide) Good morning. Thank you for this opportunity to participate in an important discussion of air cargo and how we can meet some of the issues facing it. I’d first like to say that on behalf of more than 300,000 FedEx team members around the world, we are deeply saddened by the loss of the Malaysian Airlines flight Friday and extend our deepest sympathy to the families of those who were on it. I know all of us here today will keep them in our thoughts. __________ Transformation through Innovation is a great theme for this symposium because today the air cargo industry is in the midst of 1
a profound transformation that requires new ways of thinking about our future. However, that future is unlikely to be analogous to the industry’s “Golden Age” of the 1990s and early 21 st century. To understand where we’re going, it’s important to review the macroeconomic and technological factors that led to air cargo’s spectacular growth. The growth of trade and air cargo Surveying the devastation of World War II, American leaders like Secretary of State Cordell Hull believed the integration of world markets would be essential to rebuild countries ravaged by the war. • The General Agreement on Tariffs and Trade, or GATT, was the result, and America’s opening its markets was a key element in the recovery of Germany and Japan, ( slide 2 – Asian Tigers) in the emergence of a strong European economy, and in the rise of the “Four Tigers” of Asia—Hong Kong, Taiwan, Singapore, and Korea, where significant investments in manufacturing in the 60s, 70s and 80s lifted tens of millions out of poverty. 2
Trans-Pacific and Asia-to-Europe air shipments of electronics and auto parts were integral to the development of sprawling supply chains throughout the world. ( slide 3 – Cargolux freighter) The backbone of these networks was the Boeing 747F, introduced in 1971, with economics that were a quantum jump over previous generations of air freighters. 3
It’s important to note that America’s post-World War II embrace of free trade was based on geopolitical considerations as much as commercial calculations. ( slide 4 – FedEx logo slide) • Accordingly, the United States’ relatively open markets were often sacrificed to more mercantile practices of some trading partners. • As normalized relations were restored with China, and the GATT morphed into the WTO, the stage was set for the most phenomenal economic transformation in the modern era— the export-driven rise of China and its accession in 2001 to the WTO. • Hundreds of millions of people were brought out of poverty in China and other nations such as India and Brazil that embraced more liberal global trade in the 1990s and early 21 st century. 4
• High value-added products—particularly electronics—saw air cargo grow on average at two and a half times the rate of world GDP for two decades. Post–recession realities Unfortunately, a number of factors that produced this success story have reversed since the Great Recession of 2008 • ( slide 5 – China dragon) China’s fantastic economic growth has spawned significant wage increases that dampen exports, and China has adopted an “Indigenous Innovation” policy which favors local companies over foreign competitors despite WTO prohibitions to the contrary. • Partly as a result, China’s logistics costs are about 20% of GDP vs. 9 to 9.5% in the U.S. Such inefficiencies make it hard for the Chinese economy to evolve to a more 5
consumer-driven economy vs. their current model based on exports and infrastructure investment. • One big reason trade is no longer growing rapidly is the rise of protectionism, not just in China but around the world. Over the last few years almost every trading nation has instituted policies that permit greater regulatory intervention in the trade processes—often justified by overzealous security considerations. Unfortunately, in many other cases, the protectionism is overt and politically driven. History shows that protectionism—whatever the justification—stifles competitiveness, innovation, and consumer choice. • The result of all these factors is that exports have been declining with most major trading partners since CY 2010, as you can see in this chart. ( slide 6 – export trends for top FedEx m arkets) . • Another unique factor in the air cargo sector is the miniaturization of electronics which represents about half the 6
tonnage transported by air ( slide 7 – sem i-conductor billings) . Not only is there less weight being transported, but price reductions driven by technology have reduced the value-per- pound. New product introductions that require large main- deck freighters have slowed considerably as the market for electronic devices has been satiated. • Perhaps most important, over the past decade fuel prices have increased fourfold ( slide 8 – rising fuel costs) , substantially raising air transportation vs. ocean shipping costs. 7
Moreover, low interest rates have reduced the carrying costs for inventory on sea voyages, while ultra- large container ships have reduced unit costs. And at the same time, ocean transport has become more reliable with more sailing frequencies per lane offered by carrier alliances. Combined with improved shipment information, fuel-efficient slow- steaming container ships allow products to be landed at the destination port with great predictability. • The rapid growth of international air passenger traffic and modern efficient long-range twins such as the B777, A330, B787, A350 and the recently launched 777-8/ 9 have created an increasing amount of low-cost underbelly lift and more origin and destination pairs, particularly over the rapidly growing hub networks in the Middle East. • Finally, new fuel-efficient, twin-engine freighters in the form of the 777F ( slide 9 – 7 7 7 F) and the A330F provide airlift with much lower unit costs than the 747-400 and MD11 8
freighters that were the workhorses of the air cargo “Golden Age” previously mentioned. • To give just one example, a 777 freighter flight from Hong Kong to Anchorage costs $30,000+ less than a 747-400F while carrying almost the same payload. Given all these factors, 43 Boeing 747-400s are parked in the desert and six have been scrapped while 20 and 4 MD- 11s respectively have met the same fate. The two following charts ( slide 10 – W idebody Freighter Aircraft, All Tim e) ( slide 1 1 – Active Large W idebody freighters by Type) show the dramatic decline in the available legacy fleet and the emergence of the new modern twin freighters and the Boeing 747-8F, which is substantially more fuel-efficient than the 400s and McDonnell Douglas tri- motors being retired. 9
Except for a brief spike in freight traffic in 2010 ( slide 1 2 – Freight Traffic Grow th) when post-recession inventories were finally replenished and electronic product introductions were accelerating, all these factors have put significant pressure on commodity airport–to-airport air cargo yields which have been declining in real terms for two decades. 10
As you can see by this chart ( slide 1 3 – Current Freighter Capacity Grow th Exceeds Dem and) , current freighter capacity exceeds demand. When combined with 5-6% underbelly capacity growth driven by increasing global passenger demand, further capacity reduction will be required to staunch yield declines for commodity air freight. On the other hand, given the integration of worldwide buyers and sellers due to the ubiquitous marketplace of the Internet, door- 11
to-door shipments of smaller packages and light freight shipments continue to grow, and cross-border e-commerce is providing a boost to this sector. However, most national customs systems are far behind the needs of this market which will impede its growth if systems are not modernized to better handle this type of traffic. Door-to-door global small shipments are increasingly carried by the integrated networks of FedEx, DHL and UPS, which have dense and highly efficient pickup and delivery systems. ( slide 14 – triangles) Thus, the global air express business continues to grow as does global sea trade, with both sectors gnawing at the traditional airport-to-airport air cargo market. Moreover, yields on this type of commodity traffic have been declining in real terms over 20 years making traditional freighter services’ profitability very challenging. 12
It’s important to note that the express carriers use both indigenous aircraft and, for less urgent shipments, the prolific underbellies of passenger carriers. • FedEx’s ExpressFreighter and SuperExpressFreighter routes (nonstops in excess of 5,000 nautical miles) provide unparalleled door-to-door transit times for Priority shipments to and from almost any point on the globe. • For our Economy service we often use the underbellies of partner carriers that provide FedEx door-to-door deliveries one or two days later for more price-sensitive Economy Express shipments. • Finally, for heavier bulk shipments, our FedEx Trade Networks forwarding unit can move this traffic in a variety of cost-effective ways with reasonable transit times, whether by air or sea. “The future ain’t what it used to be” The macroeconomic picture for world trade, regardless of shippers’ needs, however, is not good in the near term. As noted before, protectionism is on the rise. 13
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