The Cargo Industry and its Relationship with Airport Planning

Eric HaoDecember 10, 2013

Airport Systems Planning

Outline

2

1. History of Aviation and Air Cargo2. Overview of the Air Cargo and Delivery Services Industry

» Growth and Importance of Air Cargo» Characteristics of Air Freight within the Value and Supply Chain» Differences in Product Delivery: Passengers vs. Cargo

3. Cargo Airports in the United States» Role of Airports and Airlines in Cargo-Based Business Model» Modern Domestic Market: Consolidation towards Hub Airports

4. Memphis International Airport: A Case Study» Overview, History, and Technical Features» A Night of Operations for FedEx Express» Challenges in Forecasting

5. Overall Summary: Implications for Airports

History of Air Cargo in the U.S. Industry

3

1910:First demonstration of air

freight—silk is shipped from Dayton to Columbus, OH

1910 – 1973:Freight was only carried by

airlines as a secondary source of revenue on their

passenger networks.

1910 1950 1970 1990 2010

1968:Frederick Smith, Yale

undergrad, challenges economic inefficiencies of passenger routes for dual

use in term paper.

1973:Federal Express, first all-cargo airline and delivery

service, is formed.

1940s – 2000Exponential growth of air freight surged in U.S. until

2001.

2013:Capacity cuts as U.S. industry

matures with two major players. Rapid growth from

emerging Asian markets.

1988:UPS Airlines is formed.

Exponential Growth of Air Cargo in the U.S.

4

• Air cargo is a key indicator of economic vitality and trade.• Since the 1960s (and before), air freight has grown

exponentially within the United States until early 2000s.» Why? 9/11. Recession. Fuel. Also…

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100

2000

4000

6000

8000

10000

12000

14000

16000

18000

Annual Domestic Ton-Miles of Freight Carried in the United States1

Mill

ion

s of

Ton

Mile

s

Growing Emphasis on International Markets

5

• As U.S. markets mature and saturate, more opportunity in emerging international markets.» In 1991, half of freight transported was within U.S. In 2010, only about

one third.

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Annual Ton-Miles of Freight by U.S. Carriers2

Domestic International

Mill

ion

s of

Ton

-Mile

s

Characteristics of Freight Transported by Air

6

• In terms of weight and volume, freight carried by air represent less than 1% of the share by mode.» However, in terms of value, air freight accounts for about 40%!3

Air0.28%

Truck31%

Railroad37%

Water11%

Pipeline21%

Proportion of U.S. Domestic Freight in Ton-Miles by Mode4

Characteristics of Freight Transported by Air

7

• In terms of weight and volume, freight carried by air represent less than 1% of the share by mode.» However, in terms of value, air freight accounts for about 40%!3

• What makes air transportation special?

• Time! Key value added by air transport.» Just-in-time delivery – reduce levels of inventory required.» Faster delivery – increases customer willingness to pay.» Economies of network size – more potential markets for retailers.» Efficiency – Links suppliers, manufacturers, retailers, end consumers.

• Most common items shipped are electronics and clothing.

Different Products: Passenger vs. Cargo

8

Passenger Cargo

• Focus on load factor for marketing and market share – frequency wins.

• Price-sensitive, volatile demand.

• Objective: minimize costs of delivering base product.

•Demand forecasting• Inventory

control•Network-focus•Hub-and-spokes

• Load factors are around 60%.

• Medium to long-term allotment service.

• Objective: focus on building relationships for long-term profitability and sustainability.

Photo courtesy: Tamas Kolos-Lakatos

Cargo Service Airports in the United States

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• Different products sold by different companies means different requirements for airports! More in depth later:» Streamlined integration with modal links (local trucking).» Land area for sorting facilities and aircraft loading.» Runway capacity for peak operations, because cargo airlines operate

on a single, nightly connecting bank.

• FAA defines a cargo service airport as an airport having a total annual landed weight of more than 100M pounds.» In 2012, 111 airports qualified and fit this definition.» Qualifies airports to obtain cargo entitlements as part of the Airport

Improvement Project.

Hub Airport is the Central Link in Supply Chain

10

Retailers Consumer

Airport

Trucking

TruckingProcessing

Airport

Logistics

Hub Airport

Photos courtesy: Tamas Kolos-Lakatos

Large Movement Towards Hub Consolidation

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Airport 2000 2011 ChangeMEM 2,489,078 3,916,410 +57%

LAX 2,038,784 1,696,115 -17%

JFK 1,817,727 1,344,537 -26%

ANC 1,804,221 2,543,155 +41%

MIA 1,642,744 1,841,929 +12%

SDF 1,519,528 2,188,422 +44%

ORD 1,468,553 1,311,622 -11%

IND 1,165,431 971,664 -17%

EWR 1,082,406 813,528 -25%

Top U.S. Cargo Airports in 2000 and 2011 (Metric Tons)5

Why the Growth in Hubs?

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Gateway to International Markets!

13

Memphis International Airport: Implications for a Major U.S. Hub Airport

14

History of Memphis International Airport

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1927:Opening of Memphis

Municipal Airport

1920 1970 1980 1990 2010

1973:Federal Express begins

operations at Memphis, its world headquarters.

2008 – Current:Delta—Northwest merger

causes capacity cuts at Memphis to remove

redundancies. As of 2013, passenger enplanements have dropped by 45%.71985:

Designation of a hub for Republic Airlines.

2000

1986:Merger with Northwest

Airlines bolstered traffic to Memphis.

2007:Passenger traffic peaks as Northwest accounts for

about 81% of total enplanements.6

Geographic Location of MEM

16

Layout of Memphis International Airport

17

Passenger Facilities

R1

R2 R3

R4

FedEx Facilities

1 KM

Relationship with FedEx Express

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• Flexibility required in establishing a major cargo base.» FedEx facilities occupy (lease) 18% of the total land area at MEM.» Centralized sorting operations, corporate offices.» Fourth largest fleet in the world in terms of fleet size.

• Mutually beneficial relationship between company and airport established foundations for the hub:» Over 10,000 people employed in the Memphis area by FedEx Express.

• Reasons for selecting MEM as the headquarters:» Good weather, which is crucial for cargo operations.» Central Time Zone – one extra hour with the proximity of east coast.» Geographic location – centered between west, south, and east coast.» Lure of $6M loan by the airport in 1972.» Founder’s hometown.

Operations Montage

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• In the evening, the first inbound flights arrive at MEM. » In total, 150 aircraft land and depart, peaking at one operation every

30 seconds.

Photo courtesy: Tamas Kolos-Lakatos Operations Information from FedEx8

Operations Montage

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• 7,500 associates unload packages off the aircraft and transport them to the Primary Matrix, FedEx’s main sorting facility.

Operations Montage

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• Around 2.2 million packages get dumped nightly onto the top rack of the Primary Matrix’s 80 conveyor belts.

• 17M shipments on X-MAS.• 42 miles of conveyor belts.• 500K packages/hour.

Operations Montage

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• The package is scanned by a light curtain, which retrieves information about its origin, destination, weight, and shipper.

Operations Montage

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• After scanning, the package is collected via robotic controls and sorted at least three times before it clears security and is organized into an outbound container.

Operations Montage

24

• The outbound containers are loaded onto the aircraft, which all leave Memphis by 6:00 AM.

Operations and Implications for Airports

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• Capacity» Single connecting bank concentrates demand on peak periods.» Recent emphasis on hub-to-hub international flying.» FedEx business model (space reserved for long-term partners) means

large portion of flights fly half empty!

• Weather» Because of the nature of the delivery industry (time is key!), delays are

crippling.» Airline requires privileged access and space to airport terminal and

runways.

• Noise» Nighttime flying.» 8,750 housing units and seven schools affected.» Noise abatement strategies (preferential VFR corridors, FAA Stage 3)

Challenges in Forecasting and Planning

26 Source: MEM Master Plan9

Challenges in Forecasting and Planning

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2006 2007 2012 2017 20273,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

Forecasts for Total Air Cargo Tonnage

Actual Baseline Low Growth High Growth Real

Metr

ic T

ons

of

Carg

o

Historical Forecast

Source: MEM Master Plan9

Overall Summary

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• Recent Trends» Maturity of the U.S. cargo market and the rise of globalization.» Result for Airports: Emphasis on serving emerging markets results in

need for more hub-to-hub flying.

• Fundamentally Different Business Model» Smaller customer base results in relationship-based industry, longer

term cargo contracts, and higher quality of service.» Time-based product value perishes with delays.» Result for Airports: Higher degree of collaboration and flexibility

required for cargo-based airlines.

• No Airlines, No Airport» Delta-Northwest merger resulted in dramatic loss of service to

Memphis, destroying expectations for forecast increase.» Result for Airports: Future of Memphis International Airport requires

major reconsideration of expansion feasibility.

Bibliography

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1. RITA – BTS. Air Cargo Summary Data. U.S. Department of Transportation. 2013. Report. Available: http://www.transtats.bts.gov/freight.asp

2. RITA – BTS. Table 1-49: U.S. Ton-Miles of Freight (Millions). U.S. Department of Transportation. 2013. Report. Available: http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_49.html

3. Chopra and Meindl. Supply Chain Management (5th Edition). Prentice Hall, 2012. Print.4. RITA – BTS. Table 1-50: U.S. Ton-Miles of Freight (BTS Special Tabulation) (Millions). U.S. Department of

Transportation. 2013. Report. Available: http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_50.html

5. Airports Council International. Airport Traffic Reports. Airports Council International – North America. Web. Retrieved: November 26, 2013. Available: http://www.aci-na.org/content/airport-traffic- reports.

6. Jacobs Consultancy. Airport Inventory Master Plan Update: Memphis International Airport. Rep. No. MEM548- 1. Memphis, TN: Memphis-Shelby County Airport Authority, 2010. Print. Available:http://www.mscaa.com/themes/memairport/images/MPAIRINV.pdf.

7. RITA – BTS. Table 1-44: Passengers Boarded at the Top 50 U.S. Airports. U.S. Department of Transportation. 2013. Report. Available: http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_44.html.

8. FedEx YouTube Channel. Inside the FedEx Memphis “Super Hub”. Web. Retrieved: November 27, 2013. http://www.youtube.com/watch?v=iYzQ7JSBIGU.

9. Jacobs Consultancy. Aviation Demand Forecasts: Master Plan Update for Memphis International Airport. Rep. No. MEM548-2. Memphis, TN: Memphis-Shelby County Airport Authority, 2010. Print.

http://www.mscaa.com/themes/memairport/images/MPADF.pdf.