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

2. 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%

3. World Cargo Growth Detail

4. 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

5. Recent Air Cargo Trends
http://www.boeing.com/commercial/cargo/01_01.html

6. 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

7. 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

8. World Freight Fleet 2003

9. World Freighter Fleet Growth

10. 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.

11. But Yield Trends Decline

12. 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.

13. ACMI Providers

14. 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

15. 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.

16. International Express Market

17. Air Cargo Services and
Internationalization of
Manufacturing Firms
in Southeast Asia

18. 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?

19. 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

21. 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?

22. 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

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

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

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

26. 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)

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

28. Average Cargo Intensity and Cycle Time
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2
4
6
8
10
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Average
Air
Intensity
Index
0
5
10
15
20
25
30
35
40
45
50
Cycle
Time
(Days)
Air Cargo
Intensity
Cycle Time
(Days)

29. Intel-Philippines and Air Cargo

30. Brady-Singapore and Air Cargo

31. AVX-Kyocera Singapore and Air Cargo

32. 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 labor-intensive
workforce. NO
 The intensity of air cargo usage is
inversely related to the average cycle
time of a firm’s operation YES

33. 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

34. 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

35. 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 12-18 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
semi-autonomous Subic Bay Metropolitan
Authority.

36. Subic Bay, Philippines

37. 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

38. FedEx “Asia One” Network

39. 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

40. 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

41. 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]

42. 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)

43. 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 Philippine-
USA 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)

44. 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