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Trade Patterns and the Future of International Air Cargo
FWS IATA Speech
March 11, 2014
(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
Transformation through Innovation is a great theme for this
symposium because today the air cargo industry is in the midst of
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
To understand where we’re going, it’s important to review the
macroeconomic and technological factors that led to air cargo’s
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
The growth of trade and air cargo
• 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.
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.
It’s important to note that America’s post-World War II embrace
of free trade was based on geopolitical considerations as much as
(slide 4 – FedEx logo slide)
• Accordingly, the United States’ relatively open markets were
often sacrificed to more mercantile practices of some trading
• 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
• 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
• 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.
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
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 markets).
• Another unique factor in the air cargo sector is the
miniaturization of electronics which represents about half the
tonnage transported by air (slide 7 – semi-conductor
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
At the same time, 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 – 777F) and the A330F provide airlift
with much lower unit costs than the 747-400 and MD11
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 – Widebody Freighter
Aircraft, All Time) (slide 11 – Active Large Widebody
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.
Except for a brief spike in freight traffic in 2010 (slide 12 –
Freight Traffic Growth) 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.
As you can see by this chart (slide 13 – Current Freighter
Capacity Growth Exceeds Demand), 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-
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
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
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
• 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 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.
“The future ain’t what it used to be”
(slide 15 – protectionism is up)
Last year, the top 20 world economies passed 23% more
protectionist measures than in 2009. A few examples:
• Argentina has passed 168 measures since 2009. Could the
recent crisis there be somewhat related?
• Canadian interests recently opposed lifting de minimus
clearance limits, perceiving such a change as injurious to
• Last month, FedEx couldn’t ship pillows, which were in short
supply, to Olympic athletes in Sochi because Russian
customs restrictions would cause a six-week delay in
And despite the efforts to date on initiatives such as the Trans-
Pacific Partnership (TPP), the Transatlantic Trade and Investment
Partnership (TTIP), NAFTA 2.0, and the Trade in Services
Agreement (TISA), prospects for more robust trade liberalization
are not good in 2014 in part because of the U.S. election cycle.
• Both Democrats and Republicans are even resisting the re-
institution of Trade Promotion Authority (TPA), which gives
the U.S. President the ability to negotiate trade deals with
only an up or down vote by Congress.
• And absent TPA, there is no possibility of American again
leading the way—as it did for over 50 years—towards more
This is indeed unfortunate as history shows innovation,
investment, and larger markets have been the main drivers in
improving living standards and reducing poverty around the
• In this regard, according to a 2012 analysis by economists
Petri, Plummer and Zhai, the TPP has been estimated to add
about $295 billion a year to the world economy. And the
London-based Centre for Economic and Policy Research
estimates the TTIP to add around $130.5 billion a year to
the U.S. economy alone.
• Also, if enacted, the agreements would create millions of
jobs around the world in many sectors including ours.
Over the last several years, trade growth has decelerated from
two and a half times world GDP in the first part of this century to
much lower levels.
• It’s no surprise then—as the following chart shows (slide 16
– World Trade Volume vs. Global Real GDP) — both
global trade and air cargo have flat lined.
Absent a change in the outlook for overall global trade and
given the introduction of over 200 efficient 777, A330, and
747-8 freighters, more 747-400Fs and MD-11Fs will have to
• Their economics simply cannot compete with the more
modern airplanes. Moreover, underbellies will be
increasingly attractive for the smaller shipments that do not
require Priority service.
All of us may wish for a return of the halcyon days of double-digit
air cargo growth, but we are creatures of much larger forces and
the winds are not favorable (slide 17– Industry Context ), as
this chart illustrates.
We at FedEx are committed to extolling the demonstrable
benefits of growing world trade and pushing our politicians hard
to look at the greater good of endorsing the new treaties
(slide 18 – FedEx logo slide)
We hope everyone involved in our industry will do so as well. In
that way, we can ensure that a transformed air cargo industry
can deliver the innovative services and efficient logistics support
the global market requires.