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					             2001: An Airspace Odyssey
            The Airport Noise Symposium

                   University of California
             Institute of Transportation Studies


Air Cargo and Electronic Commerce
                     William Langham, PhD
                       Managing Director
                    Strategic Market Analysis
                  FedEx Services, Memphis, TN

                        February 28, 2001
                         San Diego, CA

7/29/2012                                          1
              Air Cargo and Electronic Commerce

• Air Cargo Customer requirements
     – Air Cargo Growth Trends
     – Air Cargo & GDP
• Electronic Commerce Trends
     – Overarching Trends in Business & Manufacturing
• Business, Manufacturing, Electronic Commerce
  Impact on Aircraft Choice, Airports, Flight
  Operations
• Summary


7/29/2012                                               2
                         You are the CEO
              Your mission is to satisfy your customers


Suppose you are a home business owner making
specialty dolls that customers order over the internet,
                           or
   you are the CEO of a major distributor such as:
             Wal-Mart
             Intel
             Dell
             General Motors


  7/29/2012                                               3
            Customer Requirements for Air Express


• High-Value Products and Critical
  Documents
• Just in Time / Time-Definite
• Time-sensitive
• Information Intensity
• World Wide Geographic Coverage



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             Customer Requirements for Air Express


• JIT / Time-definite
  –   Specific Time Commitments
  –   Express Service (NFO, Next-day at 10:30 or 3:00)
  –   Economy Service (2D, 3D, 4D, 5D)
  –   Late Pickup, Early Delivery
  –   Highly Reliable
  –   Total Custodial Control



 7/29/2012                                           5
             Customer Requirements for Air Express


• Information Intensity
  – Tracking and Tracing
  – Pro-active Delay Notification: GIVS (Global
      Inventory Visibility System)
• Worldwide Geographic Coverage
  – Ability to Pick Up and Deliver Anywhere
  – Customers Prefer to Use a Small Number of
    Carriers



 7/29/2012                                           6
               Transportation / Logistics Providers Must also
               Consider the Overarching Trends in Business


• Globalization / Decentralization of Manufacturing
   – Long Beach: Late pickups require aircraft from LGB
     and Ontario airports to serve local areas. LAX unable to
     serve due to distance or increasing traffic gridlock.
   – Sioux City, South Dakota: Gateway can choose their
     optimal location without transportation constraints,
     since Express service that FedEx created is ubiquitous
     in the US.




   7/29/2012                                                7
                Transportation / Logistics providers must also
                 consider the overarching trends in business


•   Miniaturization: high-value, low-weight components
•   Mass customization
•   Supply Chain Management
•   Logistics
•   Future re-engineering with IT / internet support
•   JIT / time-definite delivery
•   Tracking, tracing, pre-alerts
•   Intermodalism
     – Air / Truck Networks
     – Truck / Rail
     – Ocean / Rail / Truck
    7/29/2012                                                    8
              Transportation / Logistics Providers Must also
              Consider the Overarching Trends in Business



• It is the customer demand for next-day express
  shipments that drives the need for night-time
  operations at airports and hubs.
• The air express customer may be a consumer making
  an individual purchase, or the customer may be a
  business managing its supply chains.




  7/29/2012                                                    9
                         Air Express and Air Cargo Growth
                              US Domestic (1970-1999)
                             US Domestic RTKs (in millions)
  16,000
                                                                                                 CAGR
  14,000
                                                                                                 19.7%
  12,000

  10,000

   8,000                                                                                          1.9%

   6,000

   4,000

   2,000

        0
       70

             72

                   74

                         76

                               78

                                     80

                                           82

                                                 84

                                                       86

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                                                                   90

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      19

            19

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* Includes Scheduled freight, Charter freight and Mail.                                  Source: Boeing
    7/29/2012                                                                                     10
             US Domestic Air Cargo Moves
               At Least 10% of US GDP


• US Domestic Air Cargo Moves 8% of US GDP
  as product, and another 2% as services
  (accounting, payroll, professional services, etc)
• Air express and air cargo are important to
  customers, as they position 10% of US GDP to
  the locations where the products become useful.
• From this we conclude that air cargo moves a
  great amount of the GDP.

 7/29/2012                                      11
                    International Trade is a Growing Component
                                 of the US Economy
             US Domestic and International RTKs (in millions)
 25,000
                                                                      Total Domestic*

 20,000


 15,000                                                                             Total
                                                                                    International*

 10,000


  5,000


         0
       85

               86

                      87

                             88

                                    89

                                           90

                                                  91

                                                         92

                                                                93

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     19

             19

                    19

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* Includes Express, Scheduled freight, Charter freight and Mail for US airlines.                  Source: Boeing
     7/29/2012                                                                                                 12
                   Projected Air Express and Air Cargo Market
                              (International - 2019)

                               International RTKs (in millions)
   450     25
                US Domestic RTKs (billions)
   400     20                                 Express: 63%

   350
           15
                                                             31%
           10

   300              Express: 4%               Freight/Mai          Int’l Express
            5


   250      0
                        1978                  1998

   200

   150                                                             Int’l Freight and mail

   100          9.2%
    50

     0
                                1999                                2019
Source: Boeing
    7/29/2012                                                                               13
                        Importance of Electronic Commerce
                               to Local Economies
           E-Commerce Online Sales Revenue as a % of Total Sales
20%

18%

16%

14%

12%

10%
                                                                   17.3%
8%

6%                                                12.6%

4%                                    8.6%
                         5.7%
2%           3.5%
0%
             2000        2001         2002         2003            2004
Source: Forrester Research, February 2000
      7/29/2012                                                            14
             Importance of Electronic Commerce to
              Local Economies (FedEx examples)


• FedEx has partnered with companies in Supply Chain
  Management and Electronic Commerce
• As one example, fresh flower consumption quadrupled
  between 1980 and 1990
• Imports from South America now represent 70% of
  fresh-cut flowers sold in the US
• Consumer prices of cut flowers fell by 15% in real
  terms since 1980
• No longer a luxury just for holidays and special
  occasions

 7/29/2012                                          15
               Importance of Electronic Commerce to
                Local Economies (FedEx examples)


• HP’s online store
  – Decreases return cycle time by 80%
   – Decreases return unit product cost by 70%
• Dell outsources most of its logistics and SCM
  functions to FedEx.
   – Delivers from Austin to rest of US
   – Delivers from Malaysia to rest of Asia
   – Dell turns inventory in less than 8 days vs. 60-90 days with
     traditional suppliers



  7/29/2012                                                   16
                 Importance of Electronic Commerce to
                  Local Economies (FedEx examples)

•   Nova Biomedical
•   HP’s online retail store
•   Dell
•   Gateway Computer
•   Submitorder.com
•   barnesandnoble.com
•   Toysrus.com
•   williams-sonoma.com
•   Adornis.com
•   Bikeworld.com
•   Calyx and Corolla
•   AeroXchange

    7/29/2012                                           17
             Electronic Commerce and Fleet Planning


• EC and underlying trends in international
  commerce will require air cargo express to
  grow
• Trend toward more widebodies
• FedEx has replaced multiple daily flights with
  fewer flights of larger aircraft size
• Progression toward larger & fewer operations



 7/29/2012                                        18
              Electronic Commerce and Fleet Planning

• FedEx order of A/C
  –   1973          Falcons         6.5k pound payload
  –   1979          B727           48k
  –   1990s         MD11/MD10/DC10 140-170k
  –   2000s         A380/MD11,MD10 140-170k+




  7/29/2012                                            19
              Electronic Commerce and Fleet Planning

• Narrowbodies serve smaller markets or secondary
  airports in metro areas plagued by air traffic
  congestion and/or traffic gridlock. For example:
   – O’Hare: An emerging role for airports in Gary and
     Milwaukee
   – LAX: Ontario and Long Beach too far in time and distance
     to be served via LAX
   – Air express customers require late evening pickup and next
     morning / next day delivery
         • Packages must be in MEM by 1:00 am for sortation
         • Cannot waste time trucking from suburban locations far from central
           airport due either to distance or traffic -- customers would shift to a
           carrier willing to fly direct


  7/29/2012                                                                  20
               Essential Aviation Services
                for a Local Community




• Match aircraft to inbound and outbound city cargo
  demands
  – Cargo does not require numerous flights/day like
    passengers do, but it does require the minimum
    essential flights, or that city receives no service




 7/29/2012                                                21
               Essential Aviation Services
                for a Local Community

• Cargo does require:
   – Late pickup / early delivery
   – Aircraft to support hub-hub flights e.g. LAX-
     MEM, LAX-OAK, LAX-EWR
   – Late a/c to support customer requirements for late
     pickup, LAX-MEM




7/29/2012                                            22
              Essential Aviation Services
               for a Local Community

• Cargo does require:
   – Secondary airports to ensure service while avoiding
     local traffic congestion (air or ground)
   – Local ground infrastructure such as close proximity
     to airport, stations, service centers, drop boxes
   – Normal aircraft service infrastructure




7/29/2012                                           23
                       Summary
• Air cargo moves a significant and growing portion of US GDP
• Trends in Manufacturing and Consumer Demand point to
  increase usage of Overnight and other Time Definite Services
   – JIT / Time-definite / Miniaturization
   – Globalization / Decentralization
   – Supply Chain Management / Logistics / Intermodalism
   – Information content
   – Re-Engineering / IT / Mass Customization
   – EC / Internet
   – Full integration transportation, communication, IT,
     logistics, and electronic purchasing


 7/29/2012                                                24
                   Summary
 – Forrester Projection that EC will account for 17% of
   the US GDP by 2004
 – More widebodies for larger markets
 – Narrowbodies to serve smaller markets or secondary
   airports in metro areas plagued by air traffic
   congestion and/or ground traffic gridlock
 – The Ultimate Decision-Maker: The Customer drives
   the transportation system
 – No cargo airplane moves without a business purpose
   and each airplane delivers a major economic benefit
   to each community it serves everyday


7/29/2012                                          25
            Backup slides




7/29/2012                   26
                          Importance of Electronic Commerce to
                              Local Economies (BTB/BTC)


Total E-Commerce Revenue (Online Sales Revenue) Forecast

In Billion USD                        2000      2001       2002       2003       2004     CAGR %
Total                                $488.7    $864.1    $1,411.3   $2,817.2   $3,189.0    59.8%
B2C                                  $82.5     $147.5     $244.4     $993.8     $493.5     56.4%
B2B                                  $406.2    $716.6    $1,166.9   $1,823.4   $2,695.5    60.5%

Total Trade                         $11,745.0 $12,580.8 $13,498.2 $14,508.6 $15,621.7

 EC revenue as a % of Total Trade    3.5%       5.7%      8.6%       12.6%      17.3%




  Source: Forrester Research, Inc. February, 2000

     7/29/2012                                                                                27
             Importance of Electronic Commerce to
              Local Economies (FedEx examples)


• Nova Biomedical
  – Manufacturer of blood-diagnostic devices
  – Low inventory
  – Central distribution location
  – Express distribution




 7/29/2012                                          28
              Importance of Electronic Commerce to
               Local Economies (FedEx examples)


• Nova Biomedical
  – $6 million inventory on $80m business
  – Saves its customers $5m+/yr vs. 3-month inventory
    level
  – Reduces inventory losses due to product
    obsolescence
  – Rapid overnight delivery
  – “Total cost is everything” including “the
    satisfaction of our customers.” John Wallace, CEO,
    Nova

  7/29/2012                                          29
              Importance of Electronic Commerce to
               Local Economies (FedEx examples)

• Phillips Semiconductor
   – Outsources SCM to FedEx
   – Global customer response time reduced to less than
     5 days from 2 weeks
   – Frees up $millions of unproductive value stockpiled
     in inventory
   – Lower administrative costs vs. multiple carriers,
     freight forwarders, customs brokers
   – Customer receives quicker delivery at less cost


  7/29/2012                                          30
              The FedEx Formula


• Inputs
  – Faster / JIT / Time-definite
  – Near perfect reliability
  – Information Intensity
  – SCM / EC
  – Re-engineering



 7/29/2012                         31
             The FedEx Formula

• Outputs
  – Less expensive in total distribution costs
  – Speed to market
  – Savings to customer
  – Lower inflation in FedEx sphere of influence




 7/29/2012                                     32
                         Importance of Electronic Commerce
                             to Local Economies (BTB)
                         8 of the Top 10 Industries Projected to Use EC in                                 Online Sales as a %
Online Sales                                                                                               Of Total Sales
                         2004 Are Major Users of Express Shipping
 $700,000                                                                                                    45.0%
               Computing & electronics

                        Computing and                                                                        40.0%
 $600,000
                        electronics

                                                                                                             35.0%

 $500,000
                                                                                                             30.0%
                               Motor
                      Motor vehicles Vehicles
 $400,000
                                                                                                             25.0%



                                   Petrochemicals                                                            20.0%
 $300,000
                                 Motor Vehicles
                                                              Office Products                                15.0%
 $200,000
                                                  Utilities                                                  10.0%
                                                                           Consumer goods
 $100,000                                                                                      Aerospace     5.0%
                                                                                               & defense
                                                                                    Pharma/Medical
      $-                                                                                                     0.0%


Source: Forrester Research, February 2000
7/29/2012                                                                                                            33
                    Importance of Electronic Commerce to
                             Local Economies
               E-Commerce Hypergrowth Timing by Region

    North America


            Western Europe

                           Asia Pacific

                                            Latin America

                                                 Eastern Europe


                             Africa and Middle East



  2000      2001    2002     2003    2004      2005    2006     2007     2008     2009     2010

                                    Year that Hypergrowth starts

                      Earliest Country       Weighted Average          Latest Country



                                                              Source: Forrester Research, Inc.


7/29/2012                                                                                        34
                      How Did EC Perform in 2000?

                  Online Retailing Revenue Posts $48.3 Billion in 2000
                8.0
                8.0




                6.0
     Monthly 6.0
     Monthly
      online
      online
      Sales
      Sales
    ($billions)
    ($billions)
                4.0
                4.0




                2.0
                2.0                                        Sep Oct
                       Jan Feb Mar Apr May Jun Jul AugSep Oct
                       Jan Feb Mar Apr May Jun Aug                         Nov
                                                                           Nov    Dec
                                                                                  Dec
                                                       4.2 4.2 4.4
              billions 2.8 2.4 3.0 3.3 3.4 4.04.04.0 4.0 4.2 4.4
              billions 2.8 2.4 3.0 3.3 3.4
                                                                            6.4
                                                                           6.4    6.2
                                                                                  6.2

Source: National Retail Federation and Forrester Research, February 2001
  7/29/2012                                                                         35

				
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