You’d be hard pressed to find stronger evidence of the shift of freight transportation from air to sea than when FedEx, operator of the world’s largest air cargo fleet, points it out.
Higher jet fuel prices, more reliable container shipping services and the broader push to cut transportation costs amid a sluggish economic recovery are driving the shift. Shippers tend to pay seven to 10 times more for shipping by air than by container line. The sea change has been particularly evident in high-tech shipments, a foundation of air carrier business. Consider, for example, that roughly 58 percent of all LCD TVs were shipped by air in 2002, but only 22 percent moved by plane five years later, according to FedEx.
The air cargo industry has suffered additional headwinds by the scaling down of the size of high-tech products, and delayed replacement of computers, laptops and other similar electronic goods. The European economic slowdown and the resulting dampening of imports from Asia have only exacerbated the broader shift.
“I think, in the larger perspective, over several years now, it’s very clear that the door-to-door Express segment is growing, the movement of goods on the water is growing and traditional airport-to-airport commodity air freight is not growing,” FedEx CEO Fred Smith told investors on June 20.
Shippers’ shift toward slower and cheaper transportation services pulled down FedEx Express’s fourth quarter operating margins from 6.5 percent to 4.1 percent on a year-over-year basis. With less overall air freight demand on the horizon, the parcel giant plans to retire 24 aircraft, extend the depreciable lives of 54 older aircraft and take deliveries of fewer aircraft in fiscal 2013.
“As fuel prices have increased over the first decade of the 21st century, air express has been growing, but commodity air freight has been stagnant,” Smith told an aviation group in New York in late May.
Container ships have gotten larger, providing more economies of scale, while air freighters have become more efficient and with longer ranges, but not larger capacity, he said. For instance, the largest container ships each have 138 times the capacity of a Boeing 777, the most fuel-efficient air freighter. A ship uses one ton of fuel to move 330 tons of cargo from Los Angeles to Hong Kong, while an air freighter would have to burn roughly 330 tons of fuel to move the same size load the same distance.
Additional belly capacity in long-range passenger aircraft also has snagged “more urgent, lighter shipments” from all-cargo air services, Smith said.
“Moreover, international air cargo is becoming more volatile with both the frequency and amplitude of business cycles increasing and electronic product introductions becoming episodial,” he said. “This makes it very difficult for many operators to effectively utilize all-cargo aircraft over longer periods of time.”
But the modal shift from air to sea shouldn’t be seen as an obituary for the former, said Brian Clancy, co-founder and managing director of Logistics Capital & Strategy. Instead, freight transportation will resemble more of a U-shape, with expedited air services on one side, ocean shipping on the other and traditional air freight in the trough. More of the traditional air freight, or airport-to-airport business, will shift toward the ocean side, while express freight will continue to grow because of the need for emergency and time-sensitive deliveries.
Despite its heavy air cargo assets, FedEx appears well-placed to ride the modal shift. FedEx Trade Networks, the company’s forwarder and customs brokerage arm, can tap into its ground and less-than-truckload services to ensure “higher predictability” of shipments coming via container line, President and CEO Fred Schardt said.
The connectivity, for example, allows shipments coming into the West Coast to be “injected directly” into FedEx’s Ground and less-than-truckload network. Since 2008, FedEx Trade Networks has opened 50 offices worldwide, broadening the company’s reach to about 91 percent of the world.
Management has signaled the service is gaining new customers weekly, underscoring the overall trend of integrators snatching business away from traditional forwarders, BB&T analyst wrote in a June 20 research note. Unlike forwarders, FedEx Trade Networks can tap the parent company’s fleet of 100 long-range wide-body freighters to handle surges of high-tech shipments. On the ocean side, shippers can opt for prioritized service that offers greater delivery dependability. The shift isn’t just by mode but toward greater flexibly needed to attract a more frugal shipper.