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A Report on The New York Air Cargo Association April luncheon by Assignment Editor Walter Adler

Small Parcel Transport Industry Prediction

     There is a great uncertainty as to the future state of the American economy. Confronted with recession, war, and an increased emphasis on globalized trade many wonder what affect the economy will have on their respective industries. Perhaps the most attuned to the socio-economic climate are those involved in the Air Cargo Association. These men and women whose livelihoods revolve around the transport of goods and mail, both internationally and domestically have a keen interest in economic development. That is why the Association asked Ken Hoexter, the Managing Director of Global Securities for Merrill Lynch, to give an overview of the potential future of the small parcel industry.
     The small package industry moves 12% of the Gross Domestic Product (GDP) up from 3% about 25 years ago. This 75 billion dollar industry is responsible for the bulk of product transport. With the growth of the Internet and electronic commerce, the small parcel industry has shifted toward higher value goods. This includes pharmaceuticals, wholesale items, and manufactured goods. Roughly of all small parcel goods are moved via overnight delivery. This means a reliance on air cargo freighters. Overall growth of the industry follows an 87% correlation between air cargo and the GDP. According to Ken Hoexter, FedEx recently admitted that the overnight business cannot grow faster than the GDP. During a recession, that means a direct blow to the expansion of the air cargo industry and a relative slow down for the major players.
     To cope with the recession there have been some interesting changes in the supply chain. The industry is moving toward smaller more frequent shipments. This means leaner inventories at the shippers are using streamline processes to generate greater product efficiency. A trend in the market shows that people are willing to pay increased prices for time sensitive goods. This means rather than focus on bulky items more money can be made by increasing the marketability of overnight small parcel transport. “They need to meet customer needs; they thus provide an asset the customers want,” stated Hoexter.
     Technology has also played a role in development of a new supply chain as is becomes an enabler for faster and more accurate transport of goods. “The ability for shippers to be able to determine where their package is at any given moment is increasingly important,” said Hoexter. Advances in computer registration, mechanized sorting, and satellite monitoring have highly upgraded the small package transport system.
     Hoexter commented that globalization has created both new opportunities and problems. With 80% of the world living in developing nations the potential demand for American made goods and services is a factor being carefully considered. According to Hoexter, “household consumption over the last 20 years has increased by 70%. The world population is increasing exponentially and with population increases come new consumer markets.” Factors like the War in Iraq play an enormous role in the industry. War with Iraq has lead to a sharp increase in oil prices, but produced hundreds of government funded shipping contracts via air cargo. With future interventions becoming more likely the air cargo industry can only benefit from the government’s need for rapid transport of military equipment. The SARS (Sudden Acute Respiratory Syndrome) in China has led to a slight drop in manufacturing and a relative slow down of the previously bounding Asian market. While Globalization creates international markets, it also is susceptible to international crisis.
     Many companies are seeking to carve out respective niches in specific areas. FedEx has been trying to expand on the ground to compete with UPS. International companies are attempting to break onto the scene in the U.S. to facilitate or domestic transportation requirements. Product proliferation between all of the carriers is allowing competitors to establish increasing offerings in the ways, rates, and means of transport. However, according to Hoexter, “at the end of the day there’s not much more in the way of product improvement the companies can employ.” Large acquisitions are merging shipping conglomerates in powerful forces for the industry. While some family businesses may handle a specific type of shipping in an isolated sector, it is becoming increasingly difficult to compete with the larger companies. All carriers must focus on increasing efficiency to reduce reliance on their need to raise rates.
     According to Merrill Lynch, “We are seeing the economy grow at a 2% rate for this year, but yet our economists and strategists have called for a 50/50 chance of developed recession.” The fate of the economy is up in the air. In so far as shipping and air cargo are concerned international crisis and domestic recession only seem to be slightly slowing the industry. While it is likely to be further impacted by economic slow down and a tightening of American pocket strings as long as people need thing to get somewhere fast; air cargo will always deliver.