Denver is Mile High on Growth

FDI magazine: published in December 2012/January 2013 issue

By Karen E. Thuermer

When song writer John Denver composed his infamous tune “Rocky Mountain High” in 1973, his lyrics were meant to describe the sense of peace he found in the Rockies Mountains. But at the time, Denver, Colorado, which sits on the edge of this large North American mountain range, had become known as the second most polluted city in the United States behind Los Angeles.
In fact, in 1973, the Mile High City had 150 days of unhealthy air.
“Air quality doesn’t care about political boundaries,” comments Tom Clark, president and CEO of the Metro Denver Economic Development Corp.
The Denver Brown Cloud wasn’t the only challenge facing this once gold town gone bust. Local governments started praying on one another, stealing companies from one city to another.
“Just when the impulse says dive under the table and pull the blanket up, we decided to build a world class infrastructure,” Mr. Clark remarks.
The effort began with tearing down old viaducts that put Denver in permanent shade throughout the year, and building a baseball stadium in lower downtown.
“We built the stadium area as a pedestrian destination, which resulted in people walking through lower downtown to clubs and restaurants that began to sprout up,” he says.
Today Denver also offers a football stadium, convention center, and a new venue for winter sports. In addition, it provides an efficient transportation system that includes major highway expansions and a $7.4 billion mass transit system that will add 122 miles of rail rapid transit and extend existing routes throughout the region. Denver International Airport also continues to attract a number of international flights
Businesses have taken notice. Since 2010, 26 corporations including several Fortune 500 companies have moved to Denver. Some have announced that they are moving their headquarters there.
Arrow Electronics, which controls about 40% of the global business supplying electronic components and services primarily to manufacturers, transferred its global headquarters from Melville, NY to the Denver in 2011. Not only did it become Colorado’s largest revenue company; it put Denver at the center of a new industry, Mr. Clark says.
Hitachi Data Systems, a unit of Tokyo-based Hitachi Ltd., recently announced plans to open a new office in Denver. J Schneider Elektrotechnik, a leading German manufacturer of industrial power supplies, opened its new manufacturing center in Denver in June.
The same is occurring for innovation clusters such as medical and biotech.
DaVita, a provider of kidney care services, relocated its headquarters from California and to downtown Denver in September. BCT is expanding its global headquarters operations in Lakewood outside of Denver. Fostering future growth is the Fitzsimons Life Science District in neighboring Aurora. It’s one of the largest bioscience real estate developments in the country.
Clean tech is also significant for Denver, despite the fact Denver is ranked No. 4 worldwide as an “up-and-coming” energy city for oil and gas professionals by Rigzone.com.
In 2010, former Governor Bill Ritter signed landmark legislation that requires Colorado to generate 30 percent of its electricity from renewable sources by 2020 — the highest renewable energy standard in the Rocky Mountain West. Since then, the city has seen a 6% average annual growth in clean tech jobs.
Companies like Vestas, Energy Unlimited, Inc. (EUI), and Siemens have invested in Denver. There’s also potential for solar investment.
A big plus, Denver is known for being the No. 1 city in America for relocating young adults (25-34) during the recession. It’s also ranked third among US metropolitan areas for job growth over the 12 months ending in July.

The Heat Turns Up on Airline Emissions

By Karen E. Thuermer

Published in Air Freight Management, October 2012

As if the continuing global recession is not enough to create havoc within the air cargo industry, the issue on how to address environmental sustainability has resulted in an ugly debate.
At the heart of the matter is European Union legislation that incorporated aviation into the European Union Emissions Trading Scheme (EU ETS), effective Jan. 1, 2012.
The EU ETS was launched in 2005 to combat climate change. A major pillar of EU climate policy, the EU ETS is the first large emissions trading scheme in the world.
According to the ETS, airline emissions will be capped at 97% of their average 2004-2006 levels in 2012 and at 95% from 2013. Airlines will receive 85% of their emissions allowance for free in 2012 and will have to buy, at auction, the other 15%. This reduces to 82% for 2013-2020. Another 15% of allowances will be auctioned each year.
From 2013, the remaining 3% of allowances will be allocated to a special reserve for distribution to fast growing airlines (such as those from emerging economies) and new entrants to the market. Allowances can be bought and sold across the European Union. Airlines can buy credits from other industries but can only sell to other airlines.
The legal validity of the EU ETS has been challenged by Airlines for America (A4A), formerly known as the Air Transport Association of America. Its challenge is supported by the International Air Transport Association (IATA) and the National Airlines Council of Canada (NACC).
A4A reports that its members are complying “under protest” with the EU ETS.
“We still believe the EU ETS violates international law, including the sovereignty of the United States and imposes an illegal, exorbitant and counterproductive tax on U.S. citizens, diverting U.S. dollars and threatening thousands upon thousands of jobs,” A4A wrote in a statement.
A4A contended that none of the monies collected by the Europeans are required to be used for environmental purposes. “By contrast, the initiatives that the U.S. airlines are undertaking are resulting in real environmental improvements,” it stated.
In June, IATA, which represents 240 airlines worldwide, reiterated its call for the EU to drop its “unilateral and extra-territorial” scheme. Tony Tyler, IATA Director General and CEO, criticized the EU ETS as not being “a stepping stone” to meeting global environmental targets, but rather a “polarizing obstacle that is preventing real progress.”
He suggested that a global solution, negotiated through the International Civil Aviation Organization (ICAO), be agreed upon in 2013, and states that such proposals exist today.
At the heart of the opposition is the fact the EU levy on airlines is calculated based on carbon emissions for entire flights, not just the travel over Europe. The majority of airlines with operations to, from and within the EU are now required to monitor and report their emissions and to surrender emission allowances for any flights to and from EU airports.
Meanwhile, airlines in more than 20 countries, including the United States, China, Russia and Japan, have submitted their required baseline emissions data by the March 31, 2011 deadline. Eight Chinese and two India carriers did not comply, meaning that more than 99 percent of major airlines have complied with the first step of the EU ETS. China forbids its carriers to participate in the scheme.

Opposition Rancor

U.S. opponents did file a lawsuit disputing the inclusion of U.S. airlines in ETS. They cited that the ETS violated well established principles of customary international law by applying to aviation in third countries’ airspace and over the high seas, the Chicago Convention, the Kyoto Protocol, the EU-US Open Skies Agreement, and that such extra-jurisdictional matters should be regulated by ICAO.
While the lawsuit was dropped in March after a two-year battle against the UK government that was designated a “competent authority” responsible for administering the EU ETS, the A4A continues to dispute the ETS and states that U.S. government opposition “is crucial to bringing the EU back to the global negotiating table.” A4A President and CEO Nicholas Calio further stated that the Obama administration, the U.S. Congress and the world’s governments were now united in their opposition to the application of the EU ETS to international aviation and urged for accelerated work to reverse “this unilateral tax”.
“Our legal action was critical in bringing to light that the EU ETS violates international law and is an exorbitant money grab, which are now key points in the governments’ unified opposition to the scheme. There is a clear path for the United States to force the EU to halt the scheme and protect US sovereignty, American consumers, jobs and international law,” Mr. Calio said.
A trade war may be brewing over the issue. Russia was the first country to take a shot at the EU aviation emissions scheme. China is in great opposition to the scheme. U.S politicians in the House of Representatives have called on President Obama to take more forceful steps against the EU over the ETS and demanded officials from the State and Transportation departments to formally launch an Article 84 challenge at ICAO.
While EU Climate Action Commissioner Connie Hedegaard has reiterated Europe’s preference for a global agreement through ICAO, she added that it would have to deliver real emissions reductions from the aviation industry and could not be based on voluntary goals.
“Countries have until April 2013, when the first payments are due to the European system, to reach a global compromise,” she added.

Demonstrative Efforts

Meanwhile, efforts are continuing to make aircraft more environmentally sustainable. In 2011, airlines received approval to fly on biofuels. While very small quantities of sustainable aviation biofuel are available to airlines today, groups like the ICAO hope that governments will provide assistance so that producers will be able to deliver the quantities needed at a price comparable to traditional jet fuel, while continuing to meet sustainability criteria.
In June, the ICAO set out to show how biofuels-powered flights could be the norm with the right government assistance. With support from the Air Transport Group (ATAG), ICAO launched a special Rio+20 global initiative dubbed “Flightpath to a Sustainable Future” that consisted of a first-ever series of connecting flights powered by sustainable alternative fuels.
During this first “Flightpath”, ICAO Secretary General Raymond Benjamin traveled from Montréal to Rio de Janeiro for the United Nations Conference on Sustainable Development, known as Rio+20. Airline partners included Porter Airlines, Air Canada, Aeroméxico and GOL, and aircraft partners included Bombardier, Airbus and Boeing.

Dusk and Dawn for the U.S. Air Forwarders Market

By Karen E. Thuermer

Published in Air Freight Management, October 2012

The air freight industry in the United States continues to be in a state of flux as that nation’s economy struggles to rebound and pull out of what has become known as the Great Recession. Unfortunately, most air freight forwarders with operations in the United States see economic conditions as a series of stops and false starts.
John Hill, executive vice president of Lima, Pennsylvania-headquartered Pilot Freight Services, refers to economic conditions as “very sluggish.”
“Even overseas there is not super growth right now,” he says. “What remains the largest segment in North America are basically imports to Asia.”
Most forwarders indicate little optimism for growth, at least for the immediate future.
“It’s all about Europe having a cold, and us sneezing,” says Brandon Fried, executive director of Washington, DC-based Air Forwarders Association. “Security used to be the No. 1 issue among air freight forwarders, but now it’s the global economy.”
He contends that once the European crisis is abated, business will pick up. “But that will take some time,” he adds.
The U.S. Presidential elections are not expected to have any impact, other than to cause companies to hold off on investments until they see what the outcome will be.
“There’s a lot of money on the sidelines,” says Matt Parrott, director of transportation for St. Albans, Vermont-headquartered A.N. Deringer. “I think a lot of companies are unwilling to spend because the U.S. Dollar is still so weak and the U.S. deficit is so high.”
The financial crisis and uncertainly of the Euro only exacerbates the problem, economic experts say.

Impact on Carriers/Air Freight

Air freight is often regarded a leading economic indicator as to where markets are headed.
The long and complicated Great Recession has resulted in air carriers grounding much of their wide body fleets. Prior to that, high fuel prices caused carriers to downsize fleets. European and North American carriers, particularly, are now flying smaller aircraft on most second tier routes.
“This means that, whereas carriers might have once had positions for 15 or 16 cargo pallets on board an aircraft, today some do not have pallet positions at all,” Mr. Fried contends.
Nevertheless, the air freight business in North America has been tenuous for some time. Long gone are carriers such as Emery and BAX Global that offered upper deck capacity.
“Heavy weight cargo lift in North America doesn’t exist the way it used to,” says Mr. Hill. “What’s left are basically integrated carriers that would rather fly envelops than cargo because the yield is so much better.”
And now with less belly capacity available on airlines due to their use of smaller, narrower bodied aircraft, and the fact they offer fewer flights, forwarders and their customers are faced with fewer air options.
All combined, forwarders contend these factors have eliminated a fast forwarding network.
“There’s not a lot of growth as far as expedited transportation is concerned,” Mr. Hill remarks. “Everyone is pulling back and it seems no one is willing to put up an entire network for air cargo.”
A developing trend, however, is the move away from airlines’ use of regional commuter carriers operating smaller regional aircraft on point-to-point routes. Delta, for one, is starting to get out of those agreements and serve cities with bigger aircraft.
“We are seeing a return of larger planes to smaller destinations, particularly where it is economical,” Mr. Fried says.

Transport Shifts

Still global economic woes are causing many traditional air shippers to question the use of air freight in their supply chain.
“We see ocean freight growing in response to the need to trim transportation spend,” observes Mr. Zablocki. Consequently, many have adjusted their production and delivery schedules accordingly to avoid the high cost of air freight.
“Many shippers are beefing up stock because the cost of carrying inventory is cheaper than the cost of air freight,” remarks Mr. Parrott.
To cut costs, many forwarders are now booking cargo as sea freight and using ground transportation for domestic deliveries.
“Some are utilizing more innovative air-sea schemes to make up for time differences,” Mr. Fried adds. “Forwarders are even starting to look at ground transportation as a viable option for shipping valuable goods that are usually transported by air.”
Perhaps a sign of tenuous times is the recent move by more and more shippers to bid their business to take advantage of current air cargo rates to build a hedge against what they see could be an uncertain future.
“Many have commoditized their approach to buying transportation services, putting price ahead of all concerns for managing their supply chain,” Mr. Zablocki observes.
While this practice may be understandable in today’s economy, Mr. Zablocki states that he’s concerned about its effect on airlines that are struggling to stay solvent. “The industry could be looking at challenges ahead with capacity reductions,” he says.

Reinvention
Air freight forwarders have already spun their wheels to quickly reinventing their business and become masters at supply chain management. Some, like Pilot Freight Services — once known as Pilot Air Freight, now offer customized programs and solutions that streamline its customers’ operations, and improve efficiencies and responsiveness across their entire supply chain. That means combining efficient transport services with warehouse space, strong vendor relationships, and advanced IT systems.
A.N. Deringer offers value added services to customer, and bundles freight forwarding services with its customs house brokerage and distribution services.
“We look for ways to provide more service and reduce their total logistics costs,” Mr. Parrott says. “Our Custom House brokerage product is our lead product. We try to amplify that with all of our services.”
Mr. Fried points out that smaller forwarders also have found ways to survive in today’s tough market conditions by thinking outside of the box to exploit areas that are underserved by the big players.
One example, he says, is the trade show business. “It’s an area that companies like FedEx and UPS don’t like,” he remarks. “They might like the freight business, but not waiting around the trade show floor and providing the degree of service this business requires. It also does not fit into their hub and spoke network.”
Perhaps when the dust settles and the Great Global Recession is banned to the history books, the industry will find a forwarders market that is quite different. After all, out of the ashes the Phoenix must rise, and with it comes new opportunities. Forwarders have always known they must innovate or perish.

Tighten Your Seat Belts; More Turbulence Ahead

By Karen E. Thuermer

Published in Air Logistics Management, October 2012

 

            Industry analysts predicted 2012 would be the turnaround year for air cargo. But as the year nears its last Quarter, the industry remains a victim of the global recession. In fact, if air cargo is an early indicator of the worldwide economy – it’s time to put another notch in those seat belts. No smooth skies appear on the horizon.

Tenuous economic indicators are everywhere. In North America, manufacturing continues to be sluggish and money remains tight. In Europe, the European Union’s unending financial woes and troubled currency show little resolution. Economic indicators depict a softening Chinese economy in response to slower global trade. And in Latin America, particularly Brazil and Argentina, inflation is escalating. These factors, combined with high fuel costs, diminished cargo volumes, the cost of security and other challenges, and it’s easy to understand why the industry is troubled.

          Meanwhile, shippers continue to adjust supply chains and inventory holdings so that, only in rare instances, do they require air freight.

          “Many are beefing up their stock because the cost of carrying inventory is cheaper than the cost of air freight,” says Matt Parrott, director of transportation at A.N. Deringer.

At the June International Air Transport Association (IATA) meeting in Beijing, IATA Director General/CEO Tony Tyler told attendees that profitability within the airline industry is already “balancing on a knife’s edge.”

“If the bottom line worsens by even the equivalent of just 1% of revenue, our $3 billion profit very quickly becomes a $3 billion loss,” he said.

The deciding factor will be what happens economically in North America, Europe and Asia-Pacific — the world’s most important markets that encompass over 86 percent air cargo hauled. Mr. Tyler sees the crisis in the EuroZone as the industry’s biggest and most immediate threat.

“If it evolves into a banking crisis, we could face a continent-wide recession – dragging the rest of the world and our profits down,” he said.

Europe‘s biggest airline, Air France-KLM, has already seen losses widen to EUR895 million for the three months ending June 30, more than quadruple of the EUR197 million net loss accrued in the year-ago period. Officials say this was largely due to payouts to redundant staff.

In its latest report, IATA indicates slower growth in both air travel and freight, but with considerable variation by region and market. July freight demand was 3.2% lower than it was in the same month last year. This is down on the 0.1% year-on-year growth rate of June. IATA attributes a large part of that decline to a comparison with a relatively strong July last year, yet states that overall the trend in air freight is weak, in line with subdued world trade growth.

North American airlines’ international traffic fell 2.1% year-on-year in July (after rising 1.6% in June) in part owing to decisions to trim capacity, particularly on the North Atlantic market. Compared to June 2012, demand contracted by 1.3%. The load factor was 86.7%, the highest among all regions.

Asia-Pacific carriers saw demand growth of just 0.9% in July. This is a major slowdown from the 5.8% recorded in the June year-on-year comparison. Moreover, compared to the previous month (June 2012), demand contracted by 1.3%.

“European airlines appear to be benefiting more than Asia-Pacific airlines from the recently stronger trade flows from West to East, while the Middle Eastern airlines continue to offer strong competition on long-haul markets,” IATA writes. “The downward growth trend began in the second quarter of 2012 and has now continued into the third.”

Against this backdrop, IATA indicates Middle East carriers experienced the strongest traffic growth at 11.2% year-over-year, although this was surpassed by a 12.4% rise in capacity. Compared to June, traffic rose just 0.1%. The region’s growth trends were impacted by Ramadan, which commenced in July this year.

Etihad Crystal Cargo experienced an historic 22% year-over-year growth in freight tonnes carried during the first half of 2012; revenues jumped 13% percent. The Emirates Group posted a net profit of $629 million in 2011– its 24^th consecutive year of profit. Emirates added a staggering 22 new aircraft to its fleet, its highest in any single year, and ordered 50 additional B777-300ERs. It also added 11 new destinations and increased capacity to 34 cities, a record for the airline.

Middle East carriers are also shaking up global alliances. In September, Qantas Airways announced that it was entering into a 10-year alliance with Emirates that will see Dubai replace Singapore as the stopover point for its European services. The deal, which severs ties with British Airways and the OneWorld Alliance, is part of an effort to shore up losses from the Australian carrier’s diminishing international business.

Emirates President Tim Clarke hails the agreement, calling it “perhaps the start of a new thinking as to how the airline industry understands traffic flows across the planet.”

Meanwhile, airlines continue to reduce capacity, a move that has stabilized load factors at relatively high levels and provided some support for profitability in the face of high fuel prices.

Some, like Lufthansa Cargo, have switched capacity to more profitable routes. Lufthansa Cargo changed capacities from Asia to North America and added new destinations such as Detroit. Air France has canceled freighter service to Shanghai and is now focusing on markets in West Africa, the Indian Ocean, North America, Mexico, and Japan.

Carriers continue to retire freighters or exit that segment of the industry altogether. Jade Cargo quit the market in June due to ongoing weak demand to and from China. Air France Cargo is disposing of one Boeing 747-400ER freighter, which will reduce its fleet to two 747-400s and two Boeing 777 freighters. That’s down from a 12 cargo aircraft in 2009.

This year Cathay Pacific pulled three 747-400BCFs from its service. Cathay Pacific Group slipped into the red for the first half of 2012, reporting a new loss of US$120.5 million. The carrier, however, is adding three B747-8Fs over the next several years, bringing a total of 10 B747-8Fs to its fleet. Also on order are eight B777 freighters, which are scheduled for delivery between 2013 and 2016.

“Carriers have no choice but to renew their fleets with more fuel-efficient aircrafts, and this will continue to create over capacity during this period of low market growth,” comments Christian Sivière of Import Export Logistics Solutions in Montréal.

Meanwhile flurries of airline consolidations continue to afflict the market. The latest example is the merger between Chilean airline LAN and its Brazilian counterpart TAM.

“Consolidation will continue, in view of the low profitability of the airline industry and the capital required to renew fleets and to stay in business,” Mr. Sivière states. “But so far, the impact of the crisis has far outweighed the impact of airline consolidation.”

Despite today’s gloomy conditions, IATA’s Tyler offers a positive spin by noting how airlines have improved their competitiveness over the last 10 years. “Load factors have increased by 9.2 percentage points, and fuel efficiency is up by 24%,” he says. “Some 1.2 billion more people and 16 million more tonnes of cargo will fly this year than in 2001.”

Projections indicate an even more robust picture. IATA expects that by 2030 some 5.9 billion people will take to the air and cargo could triple to nearly 150 million tonnes.

“We should be optimistic about such a future,” Mr. Tyler exclaims. “But there are no guarantees.”