Executive Briefings

Economy, Security, Fuel Are Big Issues for Airfreight Industry

Traffic-flow imbalances and customer drift are among the effects caused by the continuing weakness of the American dollar and the high cost of jet fuel. Perhaps there are ways to rise above the challenges.

No doubt there any number of issues that concern management of airfreight carriers every day-from introduction of new products to maintaining high customer service levels. But clearly three of the biggest issues affecting the air cargo industry today are the U.S. economy, the cost of jet fuel and security measures mandated by the Transportation Security Administration and other government bodies.

American Airlines Cargo is no different from other carriers in having to deal with these issues, good and bad, according to Joe Reedy, vice president of sales and marketing. The freight division of American Airlines reportedly provides more than 100 million pounds of weekly cargo lift capacity to major cities around the world. On the good-news side, one of AA Cargo's most recent introductions is an expansion of its Expeditefs express freight service guarantee to include its truck feeder service. On the downside, the cargo division has to deal with the economy and the spiraling costs of fuel and security just like everyone else in the airfreight industry.

GL&SCS spoke with Reedy, who says he sees opportunities as well as challenges ahead.

Q: The U.S. dollar has been very weak against some world currencies for some time now, and that continuing weakness has been a field day for some U.S. exporters whose products are more affordable and in demand. How is that being reflected in the traffic patterns that American Airlines Cargo has experienced?

Reedy: Certainly, the volume of traffic, for instance, to Europe from major gateways in the U.S., like New York and Chicago, and all across the United States really, are very strong. They are probably as strong as any we've seen in years. And that's largely because of the strength of the currencies in Europe to buy U.S. products.

Q: What about in the other direction-inbound?

Reedy: The flip side of that is that we're seeing some weaknesses in the other direction, meaning that in the United States we're not able to consume as much, so our volumes are down a bit out of Europe to the U.S. That's probably the market that's seen the biggest impact when we think about our flows of traffic. It's certainly having some impact to some degree in all markets, but for us it's more in the traffic flows from Europe.

Q: Do you feel this imbalance is true for everyone that's active in the North American market?

Reedy: I would think that would be true for everybody, but you always have to factor in their capacities because people often change their capacities these days. So if somebody is adding a bunch or removing a bunch of capacity to market, you have to consider that. But if you neutralize for that, I would suspect that everybody is experiencing the same thing.

Q: Do you have a sense of which geographic regions are generating the most traffic volumes these days?

Reedy: I don't know if I can give you an expert view generally [for all cargo carriers], but for American, in the past six months I would say the market that has had the best traffic in both directions has been Latin America. That's really where we've seen the most strength. Obviously, American Airlines has a very strong schedule and presence throughout Central and South America.

The trend in Europe-where, as we said, the traffic for the most part is going into Europe-that's been going on for some months now.

We have a couple of good markets in Asia that have been doing well for several months now as well.

Business has continued to remain fairly strong for us. But the directions can change, as we have seen with these currency fluctuations.

Q: What is the feeling in the industry about the dollar?

Reedy: Well, the two questions are these, is the currency situation going to change, and the other question that's clearly out there is, what is happening with the overall economy in the U.S.? I don't know that anybody has figured that out yet.

In the meantime, we haven't touched on fuel. That's having a very big impact on our industry. It's the key driver in the total cost, ultimately, for our customers. And as these costs continue to increase, they're putting a lot of pressure on the supply chain, certainly. We've already seen some increases in the first quarter of 2008, and that certainly is not what we would like to see.

Q: Fuel costs are up for all modes, but relative to ocean transportation, fuel is more expensive than airfreight. Are you losing any customers because of that?

Reedy: Yeah, I think we're seeing some of that. Certainly, what I hear from our customers is that there is some mode shift to ocean. But I also see that there are customers who really demand or have a need for a high level of service in an express product. Our Expeditefs product is seeing tremendous growth. But as fuel continues to rise, that pushes customers to think about alternatives to airfreight for some commodities.

Q: To stem the flow of customers to other modes, what can your industry do to add value to your services or to boost your customers' productivity?

Reedy: If our customer satisfaction levels are high, there are certain products that customers are likely to continue to use even with the rising costs of fuel. Perishables and electronics, for example, are likely to continue to use airfreight.

I can tell you that the feedback we get from customers is to continue to focus on the level of service we're providing, so we're investing in technology, trying to eliminate service issues.

Q: So what are you doing?

Reedy: We're investing quite a bit in our web sites and electronic booking, for instance. There's much more of that than in the past. Five years ago, perhaps five percent of our transactions were done on the web, and now over 40 percent of booking transactions are handled that way. We're trying to free up people, we're eliminating phone calls, increasing track-and-trace.

Q: Security must be like fuel-added costs passed on to the consumer. Some transportation industry groups want the government to pick up more of the tab for security. What about in the air cargo arena?

Reedy: Is there an interest or an outcome? Certainly that discussion has been going on since day one, but I'm not aware of any real traction in moving these costs to the government.

We're actively engaged with the TSA and with customers and the trade industry to make sure that as we make changes to provide security that we don't interrupt the needs of our customers and the service levels they need for their customers.

What is needed by our customers, who are mostly forwarders, is to make sure that the programs that we are required to implement are done so efficiently. It's not just about cost of the transaction itself. The real question is, what do these security measures do to the level of service we can provide? For instance, does it change the amount of time we need in advance of the shipping to perform that screening? Does it change the products themselves that we offer? If cut-off times are changed dramatically, well then what is it that you are offering as an air cargo product? So we're very focused on those issues.

We know there are these three dimensions challenging us out there-the economy, fuel, security. At American Airlines, Safety and Security are always our number one concern. And, we're tuned up on what customers need. We've got to make sure we're on our game.

No doubt there any number of issues that concern management of airfreight carriers every day-from introduction of new products to maintaining high customer service levels. But clearly three of the biggest issues affecting the air cargo industry today are the U.S. economy, the cost of jet fuel and security measures mandated by the Transportation Security Administration and other government bodies.

American Airlines Cargo is no different from other carriers in having to deal with these issues, good and bad, according to Joe Reedy, vice president of sales and marketing. The freight division of American Airlines reportedly provides more than 100 million pounds of weekly cargo lift capacity to major cities around the world. On the good-news side, one of AA Cargo's most recent introductions is an expansion of its Expeditefs express freight service guarantee to include its truck feeder service. On the downside, the cargo division has to deal with the economy and the spiraling costs of fuel and security just like everyone else in the airfreight industry.

GL&SCS spoke with Reedy, who says he sees opportunities as well as challenges ahead.

Q: The U.S. dollar has been very weak against some world currencies for some time now, and that continuing weakness has been a field day for some U.S. exporters whose products are more affordable and in demand. How is that being reflected in the traffic patterns that American Airlines Cargo has experienced?

Reedy: Certainly, the volume of traffic, for instance, to Europe from major gateways in the U.S., like New York and Chicago, and all across the United States really, are very strong. They are probably as strong as any we've seen in years. And that's largely because of the strength of the currencies in Europe to buy U.S. products.

Q: What about in the other direction-inbound?

Reedy: The flip side of that is that we're seeing some weaknesses in the other direction, meaning that in the United States we're not able to consume as much, so our volumes are down a bit out of Europe to the U.S. That's probably the market that's seen the biggest impact when we think about our flows of traffic. It's certainly having some impact to some degree in all markets, but for us it's more in the traffic flows from Europe.

Q: Do you feel this imbalance is true for everyone that's active in the North American market?

Reedy: I would think that would be true for everybody, but you always have to factor in their capacities because people often change their capacities these days. So if somebody is adding a bunch or removing a bunch of capacity to market, you have to consider that. But if you neutralize for that, I would suspect that everybody is experiencing the same thing.

Q: Do you have a sense of which geographic regions are generating the most traffic volumes these days?

Reedy: I don't know if I can give you an expert view generally [for all cargo carriers], but for American, in the past six months I would say the market that has had the best traffic in both directions has been Latin America. That's really where we've seen the most strength. Obviously, American Airlines has a very strong schedule and presence throughout Central and South America.

The trend in Europe-where, as we said, the traffic for the most part is going into Europe-that's been going on for some months now.

We have a couple of good markets in Asia that have been doing well for several months now as well.

Business has continued to remain fairly strong for us. But the directions can change, as we have seen with these currency fluctuations.

Q: What is the feeling in the industry about the dollar?

Reedy: Well, the two questions are these, is the currency situation going to change, and the other question that's clearly out there is, what is happening with the overall economy in the U.S.? I don't know that anybody has figured that out yet.

In the meantime, we haven't touched on fuel. That's having a very big impact on our industry. It's the key driver in the total cost, ultimately, for our customers. And as these costs continue to increase, they're putting a lot of pressure on the supply chain, certainly. We've already seen some increases in the first quarter of 2008, and that certainly is not what we would like to see.

Q: Fuel costs are up for all modes, but relative to ocean transportation, fuel is more expensive than airfreight. Are you losing any customers because of that?

Reedy: Yeah, I think we're seeing some of that. Certainly, what I hear from our customers is that there is some mode shift to ocean. But I also see that there are customers who really demand or have a need for a high level of service in an express product. Our Expeditefs product is seeing tremendous growth. But as fuel continues to rise, that pushes customers to think about alternatives to airfreight for some commodities.

Q: To stem the flow of customers to other modes, what can your industry do to add value to your services or to boost your customers' productivity?

Reedy: If our customer satisfaction levels are high, there are certain products that customers are likely to continue to use even with the rising costs of fuel. Perishables and electronics, for example, are likely to continue to use airfreight.

I can tell you that the feedback we get from customers is to continue to focus on the level of service we're providing, so we're investing in technology, trying to eliminate service issues.

Q: So what are you doing?

Reedy: We're investing quite a bit in our web sites and electronic booking, for instance. There's much more of that than in the past. Five years ago, perhaps five percent of our transactions were done on the web, and now over 40 percent of booking transactions are handled that way. We're trying to free up people, we're eliminating phone calls, increasing track-and-trace.

Q: Security must be like fuel-added costs passed on to the consumer. Some transportation industry groups want the government to pick up more of the tab for security. What about in the air cargo arena?

Reedy: Is there an interest or an outcome? Certainly that discussion has been going on since day one, but I'm not aware of any real traction in moving these costs to the government.

We're actively engaged with the TSA and with customers and the trade industry to make sure that as we make changes to provide security that we don't interrupt the needs of our customers and the service levels they need for their customers.

What is needed by our customers, who are mostly forwarders, is to make sure that the programs that we are required to implement are done so efficiently. It's not just about cost of the transaction itself. The real question is, what do these security measures do to the level of service we can provide? For instance, does it change the amount of time we need in advance of the shipping to perform that screening? Does it change the products themselves that we offer? If cut-off times are changed dramatically, well then what is it that you are offering as an air cargo product? So we're very focused on those issues.

We know there are these three dimensions challenging us out there-the economy, fuel, security. At American Airlines, Safety and Security are always our number one concern. And, we're tuned up on what customers need. We've got to make sure we're on our game.