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Air Cargo and Californias Economy:

A Survey of the Existing Literature

 

 

Introduction

 

Although there is a fair amount of recent literature attesting to air cargos importance to Californias economy, hardly any of it touches in any substantive way on the shipment of agricultural products.

 

Instead, virtually all contemporary studies of air cargo services in California focus on airport capacity or ground-access issues. That is hardly surprising since such studies have been funded, for the most part, by airport authorities (e.g. Los Angeles World Airports), transportation planners (e.g., CalTrans), and regional economic development organizations (e.g. Bay Area Economic Forum and the Los Angeles Economic Development Corporation). By contrast, the Goods Movement Division of CalTrans reported that it has lately been searching in vain for studies relating directly to air cargos role in moving California agricultural to overseas markets.    

 

In this chapter, we will synthesize the salient findings of the most recent studies of the air cargo scene globally and within California.

 

 

Global Air Cargo Trends

 

According to data provided by the Boeing Company[1], world air cargo traffic grew by 6.2% and 7.1% in 1999 and 2000, respectively, before plummeting by 5.9% during 2001. This decline, the worst ever in the modern air cargo industry, was largely the result of the simultaneous U.S. economic slowdown and the collapse of the technology bubble" that began in the latter half of 2000. The fall in air cargo traffic had begun well before the terrorist attacks of September 11, 2001. By the end of 2001, major air trade lanes linked to North America, Europe, and Asia had contracted 9.7%. On a positive note, signs of a recovery began to emerge during the first half of 2002, led by stronger traffic in Asian trade lanes and the U.S. domestic market.

Industry analysts agree that economic activity, as measured by world gross domestic product (GDP), remains the primary driver for air cargo industry growth. Boeing expects world air cargo growth to expand at an average annual rate of 6.4% for the next two decades. Asian air cargo markets will continue to lead the world air cargo industry in average annual growth rates, with the intra-Asian and domestic Chinese markets expanding 8.4% and 10.3% per year, respectively.

Without such strong growth anticipated in the domestic Chinese market, the world air cargo market should expand significantly slower at about 6.2% per year because of the decline in world traffic during 2001 and slower long-term forecasted economic growth for much of the developed world.

As traffic fell during 2001, the number of Western-built freighter airplanes either parked or retired doubled by year-end. During the next 20 years, the world freighter fleet will grow at a slower rate than previously forecasted but nevertheless will expand to nearly 3,100 units by 2021. Both medium and large widebody types will lead new capacity additions, growing from an overall fleet share of 39% to 60% as traffic grows on long-haul, international trade lanes.

The profit squeeze within the passenger industry has focused attention on the lower-hold revenue opportunities in the cargo market. Cargo revenue represents, on average, 13% of total traffic revenue, with some airlines reaching up to 40%. Industry yields for both cargo and passenger services have steadily declined since 1970. Such declines reflect airline productivity gains, technical improvements, and intensifying competition.

Since 1985, the trend for scheduled freight yields has been declining 3.4% per year, after adjusting for inflation. Schedule freight yields firmed from 1989 through 1991 and from1993through 1995,but then continued to decline through 1998.

From 1999 through 2001, freight yields stabilized and slightly increased by the end of 2001. This, by and large, was due to high traffic demand in 1999 as a result of
Y2K and an increase in fuel surcharge that went into effect from 2000 through 2001.

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.

ACMI services are offered for all freighter sizes, but most growth during the 1990s has been in long-haul, intercontinental markets serviced by widebody freighters. The traffic carried by ACMI widebody freighters has grown 20.0% per year since 1990. For 2001, air cargo traffic carried by these carriers contracted 14.4% following a growth of 9.3% for 2000 and 15.4% for 1999.

ACMI carriers transported approximately 8.1% of the world air cargo traffic. As air cargo traffic growth continues to outpace capacity in many markets, ACMI carriers will continue to assist traditional carriers in meeting overall air cargo demand.

The definitions of express versus non-express air cargo are increasingly blurred, as traditional airlines expand their offerings of time-definite services, and government postal authorities continue to make strides in becoming full-fledged "logistics providers," largely through the acquisition of established firms. Regardless of the entity that provides the express service, the air cargo customer will benefit from increased service options and lower prices as competing products enter the market.

The international express market continues to grow at an extraordinary pace. Growth for this segment of the industry is estimated to have grown at an average rate of 20.9% per year since 1991 (as measured in revenue tonne-kilometers [RTKs]). Such growth parallels the express industry's growth in the U.S. domestic market during the 1980s.

Beginning with a 3.2% share of the U.S. market in 1975, the express market segment now comprises approximately 60.5% of the U.S. domestic air cargo market. The high level of service offered by these express carriers has raised expectations in the industry, prompting providers of air cargo capacity to improve their service or risk losing market share.

International express traffic expanded from 3.7% of total international air cargo traffic in 1991 to 11.8% in 2001 and showed growth of 7.9% in 2001 and 17.9% in 2000. The average international express shipment size has grown from 2.7 kg (6.0 lb) in 1992 to 4.0 kg (10.7 lb) in 2001, further bolstering the overall express component of international airfreight traffic.

While growth exceeded 20.0% per year from the early through mid-1990s, the rate of increase has moderated since 1997 to 17.0%. As businesses continue to expand beyond their domestic markets, in search of new markets, the express sector will continue to grow, albeit at a more sustainable, long-term growth rate.

During the "dot.com" and technology boom years of the late 1990s, it was widely thought that electronic commerce would revolutionize the air cargo industry. In particular, it was thought that e-commerce would cause:

  • Increased air shipment volumes because of (in some cases) overly optimistic outlooks for online ordering and use of physical products, both at business and individual consumer levels.
  • Increased demand for air transportation services as a result of increased industry efficiencies through online transportation capacity exchanges.
  • Reduced use of traditional express products, particularly physical documents and small packages because of the increased use of e-mail and the Internet to transmit documents and information.

The results thus far are mixed. With the overall economic slowdown and collapse of the technology bubble, no measurable increase has yet to emerge in the air transport of goods due to the ability to order them on line.

Conversely, after the shakeout of at least 40 logistics web sites devoted to air cargo, some of these transportation exchange providers have survived and are reported to be thriving. Apparently, their ability to match air cargo capacity providers and shippers with minimal effort has brought increased traffic for some air cargo carriers, especially on hard-to-sell or weaker trade lanes.

Lastly, document transmission through electronic means, whether e-mail or the Internet, has impacted the traditional product offerings of the express carriers. In 1996, one express carrier predicted that electronic transmission of documents would eventually erode up to 30% of their physical document and small parcel business.

The recent lower growth rates of both U.S. domestic and international express shipment traffic, even during the good economic times of 1999 and 2000, are evidence that the Internet and e-mail are siphoning off this high-yielding air cargo traffic due to their ease of use and lower cost. However, it is highly unlikely that electronic transmission will completely replace express documents and parcel services given that certain items, such as small machines and spare parts and legal documents, do not lend themselves to electronic transmission.

 

World airborne cargo will grow at 6.4% per year during the next 20 years. World airfreight will grow more rapidly than mail, averaging annual growth of 6.5% through 2021. Mail RTKs will display steady growth of 3.0% annually during the same period. Meanwhile, world traffic will more than triple over the next 20 years, increasing from 131.1 billion RTKs in 2001 to over 464 billion RTKs in 2021.

The international market will out pacedomestic growth, exceeding 84.0% of total RTKs by year-end 2021. The U.S. share of the world market, currently assessed at 30.4%, will decline to 26.1% by year-end 2021. The greatest airfreight market growth is expected in those markets linked to Asia.

The freighter fleet will increase over the next 20 years from 1,775 to 3,078 airplanes. Freighters as a share of the total airplane fleet will fall from 12.0% to 10.0% because of an increase in the size of the average freighter. Taking 1,228 retirements into account, 2,531 airplanes satisfying both market growth and replacement needs will be added to the freighter fleet by 2021.

Widebody freighters, currently 39% of the fleet, will supply nearly 60% of these additions and will end the period comprising 60% of the fleet. The shift toward widebody freighters will result in a fleet-wide increase in average freighter airplane payload. The medium widebody fleet will more than triple over the next 20 yearsthe greatest change of any category.

During the next 20 years, more than 70% of the 2,531 freighter fleet additions will come from modified passenger and combi airplanes. Nearly half of these conversions will be widebody conversions. Also entering the fleet will be 681 new production freighters.

Although new airplanes will comprise a minority of the world freighter fleet by 2021, many airlines prefer the technical advantages, reliability, and fuel-efficiency of new airplanes. Half of new freighter deliveries will be in the large category.

The value of all the new freighters totals $116 billion in current U.S. dollars. By 2021, it is anticipated that freighters of all sizes will provide as much as 44.0% of the world's total air cargo capacity, a slight increase from today.

 

The profit squeeze within the passenger industry has focused attention on the lower-hold revenue opportunities in the cargo market. Cargo revenue represents, on average, 13% of total traffic revenue, with some airlines reaching up to 40%. Industry yields for both cargo and passenger services have steadily declined since 1970.

 

 

 

 

 

The Role of Air Cargo in Californias Goods Movement by H. S. Jacob Tsao, September 1998, UC Berkeley Institute of Transportation Studies Research Report UCB-ITS-RR-98-7.

http://www.its.berkeley.edu/nextor/pubs/RR-98-5.pdf.

 

The California Aviation System: Current Status and Recent Trends (December 1998) by Mark M. Hansen, Geoffrey D. Gosling and Colin Rice Research Report UCB-ITS-RR-98-12.  

http://www.its.berkeley.edu/nextor/pubs/RR-98-8.pdf

 

Alternative Access and Locations for Air Cargo (June 2002) by Randolph W. Hall, Department of Industrial and Systems Engineering, University of Southern California

http://www.metrans.org/Research/Final_Report/00-3_Final.pdf

 

An Assessment of Regional Air Cargo Trends and the Proposed San Diego Air Commerce Center (January 2001) by The London Group Realty Advisors and Crossborder Business Associates, San Diego.

http://www.crossborderbusiness.com/publicdocs/CBAReports/BFAirCargoAssessment-CBAPromoVr.pdf

 

Research Centers:

Center for International Trade & Transportation, California State University, Long Beach

Aviation Resource Center, Southern California Association of Governments

http://www.scag.ca.gov/aviation/

 

 


Taos 1998 Study: Executive Summary

Motivation of the Study. California would be the seventh largest economy in the world, if it were a nation. Efficient goods movement is crucial to Californias economy. To support continued growth of the States economy, Caltrans is leading the development of a Statewide Goods Movement Strategy. This strategy is being prepared as a response to a recommendation of the 1993 California Transportation Plan. It serves as one element, together with the Transportation System Performance Measures report being prepared in parallel by Caltrans, of the 1998 California Transportation Plan update.

 

Air cargo consists predominantly of high-value, time-sensitive or time-definite goods, e.g., electronic equipment, emergency shipments, overnight packages, etc. Timely delivery of these goods has been an important element of many manufacturing and service operations in California. Therefore, the air cargo industry is a vital part of the States economy. Continued ability of the States air cargo industry to serve the other industries in the State and the States ability to capitalize on the forecast growth of air cargo routes between Pacific-Rim countries in Asia and North America are essential to the prosperity of California. However, future demand on Californias air cargo system may continue to outpace the future supply of the systems capacity.

 

Faced with these challenges, Caltrans began a systematic investigation into the role of air cargo in Californias goods movement, as part of the larger development effort for a statewide goods movement strategy, and funded a research project in 1997 for the Institute of Transportation Studies at U.C. Berkeley to (i) gain a broader understanding of the States air cargo industry and the role of air cargo in Californias goods movement, (ii) assess the importance of air cargo to the States economy, (iii) begin identification of issues hindering efficient air cargo movement in the State, and (iv) explore possible State roles for resolving the issues. This white paper documents the findings of that research and serves as an input to the development of the Statewide Goods Movement Strategy.

 

Fast Growth of Air Cargo in California. To gain a basic understanding of the States air cargo industry, we focused on three basic air cargo traffic measures for major California airports:

 

Total Weight of Air Cargo Enplaned or Deplaned,

Weight of Air Cargo Enplaned,

Weight of Air Cargo Deplaned.

 

Although data inconsistencies exist for some major California airports, accurate estimation is achievable. With a comprehensive data fusion and processing effort, one can monitor the evolution of total, enplaned and deplaned air cargo tonnage at all major California airports. Our estimation shows that the growth of air cargo at the top ten airports in California has been very fast. Seven out of the ten airports experienced a growth rate higher than 50% in the five years between 1991 and 1996; four out of the seven experienced more than doubling of the total air cargo tonnage. The ten airports had a combined growth rate of higher than 50% in those 5 years.

 

The States Heavy and Valuable Air Cargo Traffic and Its Role in Exporting. Los Angeles International Airport was ranked as the second largest cargo airport in the World in 1996 by Airports Council International, outranked by only Memphis - the biggest hub for Federal Express. The total amount of air cargo enplaned or deplaned at the Los Angeles International Airport in 1996 was estimated by Airports Council International to be 1,719,449 tons. (Its Memphis counterpart is 1,933,846 tons.) Three out of the top twelve air cargo airports in the U.S. are in California, with a combined tonnage of more than 3 million in 1996. The 1993 Commodity Flow Survey (of primarily the manufacturing industries) estimated that, in 1992, 21.4% ($30 billion) of the non-parcel domestic air cargo, in value, originating in the U.S. originated in California. (Parcel refers to a small package and typically weighs less than 100 lbs.)

 

According to the California World Trade Commissions estimates of the value of the merchandise exported by California manufacturers in 1986, close to 70% ($16.7 billion) of the exports, in value, was shipped by air. Although accurate estimates of such percentages for recent years are not available, percentages higher than 70% have been reported. In addition, six of the twenty top U.S. exporting metropolitan areas in 1996 are in California, with the San Jose metropolitan area ranked the first. The high percentages and the high export value achieved by the six California metropolitan areas attest undoubtedly to the critical role of air cargo for Californias economy.

 

Significance of Passenger and Aircraft Traffic in the States Aviation System. Much air cargo is carried by passenger aircraft or small aircraft, and therefore it is important to understand passenger traffic and the amount of (landing and take-off) operations at California airports. Los Angeles and San Francisco International Airports were ranked as the fourth and the seventh largest passenger airports in the world, respectively. In terms of the total number of

operations, Los Angeles International Airport was ranked number three in the world. Perhaps quite surprisingly, although Oakland, Long Beach and Orange County Airports have not been considered to be major passenger airports in the State, they are actually ranked number 10, 12 and 14 in the world in terms of the number of operations (resulting partially from general aviation and cargo operations). In each of the three categories (air cargo, air passengers and aircraft operations), California has by far the busiest traffic among all fifty states of the U.S.

 

Measuring the Role of Air Cargo with Respect to Other Modes of Goods Movement. To gain an understanding of Californias air cargo movement with respect to other modes of goods movement, we focused on the following four types of mode-comparison measures:

Trucking-for-Air-Cargo Percentage: the percentage, by value and weight, of goods (across all commodity categories) moved via air-truck combination with respect to all goods whose movement involves trucking,

Commodity-Weight-Moved-by-Air Percentage: percentage of commodity weight, for individual commodity categories, that is moved by air,

Commodity-Value-Moved-by-Air Percentage: percentage of commodity value, for individual commodity categories, that is moved by air, and

Commodity-Movement-Mode Distribution: the distribution of modes of transportation for each of the commodity categories for which air cargo plays a significant role.

 

Based on the 1993 Commodity Flow Survey (CFS), we were able to develop plausible lower and upper bounds for the first quantity type and obtain lower bounds for the last three with broad commodity categorization. Note, however, that the Survey focused on the manufacturing and whole-sale industries and ignored several other industries, e.g., the service industries. Therefore, the percentages developed are valid only when the scope is limited to those industries surveyed.

 

Relative Value of Air Cargo with Respect to All Trucked Goods. Our estimation is that, for the first type of quantities, the percentages by value and weight are approximately 6.6% and 0.18%, respectively. These percentages suggest that, in California, air cargo is on average approximately 37 times as valuable as trucked goods. The estimated percentages can be significantly higher because the 1993 CFS focused only on domestic flow of commodities and could significantly underestimate the role of air cargo in the States goods movement. This is because international air cargo has accounted for approximately 40% and 50% of the total air cargo at the Los Angeles and San Francisco International Airports, respectively, in the past few years, and the 1993 CFS considers the exports portion of the air cargo movement as domestic shipments ending at the airports. In other words, such exporting air shipments are not considered at all by the 1993 CFS as goods movement involving air transportation.

 

Commodity categories whose movement involves air transportation significantly (5% or more in value) are electrical machinery, equipment, or supplies; machine, excluding electrical; instruments, photographic goods, optical goods, watches, or clocks; and apparel or other finished textile products. Because the 1993 CFS treated Parcel, U.S. Postal Service, or Courier as a single transportation mode and it is difficult to estimate the proportion of commodity weight or value moved by this mode (for individual commodity categories) whose movement also involves air transportation, we developed the percentages based on only the air-truck and air (i.e., air-only) modes. Consequently, the percentages are actually lower bounds for the industries surveyed by the 1993 CFS.

 

Role of Air Cargo in Goods Movement: Much More Important to California than to the Nation. The 1993 Commodity Flow Survey estimated that 10.4% ($639 billion) of the goods, in value, originating in the U.S. actually originated in California. It also estimated that 21.4% ($30 billion) of the non-parcel air cargo, in value, originating in the U.S. originated in California. Note that the air-cargo percentage is more than double the overall percentage. This indicates the higher importance of air cargo for California relative to that for the nation, in terms of goods value. In fact, the relative importance is even higher in terms of goods weight. The 1993 CFS estimated that total weight of commodity originating in California accounted for 5.8% (707 million tons) of the total weight of commodity originating in all fifty states of the U.S. However, total weight of non-parcel air cargo originating in the State accounted for 22.3% (701 thousand tons) of its U.S. counterpart. Note that the air-cargo percentage is almost four times the overall percentage. This further attests to the importance of air cargo relative to other modes of goods movement in California.

 

Issues in Movement of Air Cargo. With a description of air cargo activities, this paper summarizes and places major issues regarding air cargo movement in California in the context of the activities. Major issues that Caltrans or the State may not play any significant role are also included so that the relative importance of those issues (with respect to all the major issues) that Caltrans and the State may indeed play a significant role can be better assessed. Important issues include (i) the difficulty to understand Californias air cargo industry, its interaction with the States transportation system and economy, and the relative importance of issues facing the industry and (ii) traffic congestion in the States air and ground transportation systems. Possible State roles range from a proactive leader in improving the States air cargo system, to a promoter of States air cargo industry, to a facilitator/co-provider of efficient ground access to airports, to a provider of integrated traffic information to air-cargo-carrying trucks. In Californias aviation system capacity planning, a basic but crucial role for Caltrans is system coordinator and advisor.

 

A Multitude of Research Needs. Little is known about the role of air cargo in Californias goods movement, and, hence, much future research is needed for understanding this role and for developing State strategies and action plans to facilitate efficient air cargo. Although many specific research needs have been identified in this white paper, they barely begin to scratch the surface. Major categories of research needs include:

 

Improve the understanding of air cargo operations and planning.

Better understand the shippers mode choice between air cargo and other modes of transportation in Californias goods movement.

Better understand the status of Californias air cargo industry, the industrys

planning/operational issues, the shippers concerns, and the relative importance of the issues.

Develop metrics of activity for Californias air cargo industry, e.g., research into the amount of transfer traffic (i.e., connecting cargo) and transit traffic (i.e., through cargo) at cargo hubs or gateway airports in the State and factors that influence the growth of this segment of industry.

Develop metrics of performance for Californias air cargo operations.

Improve the understanding of the interaction between air cargo movement and the States surface transportation system, economy and environment. Develop metrics of such interaction. (These metrics can be used as an important input to the tasks of optimizing the operations of the overall transportation system in the State and promoting the States economy. They can also be used to perform trade-off analyses.)

Improve access to existing data sources, develop data fusion methods, identify data deficiencies, and develop data collection methods to measure the three types of metrics defined in the previous three bullet items.

Develop a methodology for forecasting future air cargo activities at individual California airports.

Develop strategies for resolving the industrys planning/operational issues and the shippers concerns and for improving air cargo planning and operations in California.

Identify appropriate State, regional and local governments roles in the pursuit defined in the previous bullet item.

 

The severe lack of understanding of the role of air cargo in Californias goods movement can be illustrated with the following data and model deficiencies.

Lack of (Public-Domain) Data and Models for Estimating Weights of Air Cargo Originating from, Transferring at, Passing Through or Destined for California Airports

Lack of (Public-Domain) Data and Models for Understanding Commodity Flow via Individual California Airports. [Tao, 1998]

 

 

 

The Journal of Commerce Online on February 28, 2003, quoted Howard Jones, U.S. cargo manager for SAS that bad weather in Spain and Portugal has caused Scandinavian importers to buy lettuce and pickles produced in California. That's traffic that SAS normally does not get. 

 

 

 

Total cargo through the Bay Areas three major international airports is expected to double from 1.75 million tons currently to 3.2 million tons by 2005 and triple to 5.5 million tons by 2020 reflecting an average annual growth rate of 6.2%.

 

A November 2000 report by the Bay Area Economic Forum, Air Transport and the Bay Area Economy, identified a number of specific issues related to air cargo and regional airport capacity:

 

Time to market: in a competitive market environment, for many companies moving new products to consumers as rapidly as possible is critical to market share;

Committed release dates: Many companies, particularly in the technology sector, announce a release date for new products in advance. Missed release dates can impact customers and investors perceptions of company reliability;

Reduced cycle times: To improve efficiency, reduce costs and deliver better customer service, many manufactures work to shorten order cycles the total transaction time from customer order to final delivery and payment. Efficient shipment is critical to this process;

Supply chain integration: Integration of the manufacturing process in a continuous flow of materials, components, subassemblies and finished products, with delivery of each on a just-in-time basis, lowers overhead and carrying costs by reducing inventories. This strategy requires a high level of precision in shipment planning, tracking and delivery, as even small delays can impact production. Air express represents 60% of the U.S. air cargo market and is growing at a rate of 25% annually. It accounts for a significant portion of time-sensitive supply chain traffic.

Perishables: Shipments of fresh produce, fresh cut flowers, meat and seafood, pharmaceuticals, photochemicals and other products requiring either simple refrigeration or sophisticated temperature controls are time-sensitive, affecting product shelf life at the point of destination.

 

Each of these business strategies and planning considerations is highly dependent on efficient air cargo operations and capacity. The significance of air transport to the technology sector and to the maintenance of agile manufacturing processes and supply chains is further reflected in research findings at the Institute of Public Policy at George Mason University that, on average, metropolitan regions with hub air cargo operations generate significantly more high-tech jobs than regions without hubs.

 

Oakland International Airport currently accounts for the largest share of air cargo operations of the three major Bay Area Airports (San Francisco, Oakland and San Jose), carrying 70% of domestic air freight and 25% of domestic mail. Nearly 70% of its cargo business comes from FedEx, which uses Oakland as its West Coast hub. UPS accounts for another 20% of Oaklands air cargo.

 

More than 80% of San Jose International Airports cargo is handled by FedEx, UPS and other integrators. Air cargo at San Jose is largely domestic, with a small but growing volume of international traffic carried mainly on passenger flights to Tokyo, Taipei, Toronto, Paris and Mexico City.

 

Airfield and facilities congestion currently constrain domestic air cargo development at SFO. As a result, future growth in domestic air cargo, as well as in domestic passenger volume, is expected to occur primarily at Oakland and San Jose International Airports.

 

Perishable products may be the exception. Most perishable products moving by air agricultural products, biomedicines, and some chemicals are shipped through SFO because of its non-stop service to 57 cities and its frequent flight schedules. SFO also handles all international mail, and more than two-thirds of domestic mail into and out of the Bay Area.

 

San Francisco International Airport is the principal regional airport for international air cargo and is expected to remain so. International shipments through SFO take place principally in the holds of widebody passenger jets, as well as in jet freighters operated by international airlines.

 

While SFO is the preferred gateway for most freight forwarders, larger forwarders often truck their cargo to Los Angeles International Airport (LAX) due to its wider choice of services and schedule, and opportunities for consolidation of Northern and Southern California cargoes.

 

Of $58.3 billion in exports through the San Francisco Customs District in 1999, 79% was shipped by air through SFO. SFO handled $46 billion in U.S. exports in 1999, of which approximately $27 billion (58%) can be classified as high technology. Major categories of technology exports include computer and electronic equipment and parts, telecommunications equipment, medical equipment and pharmaceuticals. Of $69.1 billion in imports through the San Francisco Customs District in the same period, SFO handled $48 billion (69%), of which approximately $21 billion (30%) can be classified as high technology.

 

The San Francisco Bay Area ranks as the second largest exporting region in the nation, second only to New York-New Jersey, and ahead of all other major metropolitan areas including Seattle, Los Angeles, Detroit, Chicago, Houston, Boston, Miami and Philadelphia, making access to global markets essential to Bay Area employment and business revenues.

                              

Approximately 25% of the Bay Areas economy is directly or indirectly linked to trade, and export growth has been a major contributor to job and economic growth in the last decade.

 

Silicon Valley companies generate 70% of the Bay Areas technology exports. This amount does not include services (which are also dependent on airfield capacity for passenger travel) or packaged software (a major Bay Area export), neither of which is accounted for in Federal trade statistics.

 

While air transportation is vital to the movement of trade nationally, this is emphatically the case in the San Francisco Bay Area due to the regions technology economy and the high value of its technology exports. While this is an issue for the Bay Area generally, issues of airfield and air cargo capacity will most directly affect the economy of Silicon Valley, which depends heavily on international air cargo for the export of its products. In contrast to seaports, which generally accommodate heavier, bulk or less time-sensitive shipments, the lighter, high value-added products of Silicon Valley are most often shipped by air, principally through SFO.

 

While international air cargo is not subject to major capacity constraints currently, with the anticipated tripling of air cargo by 2020 80% of that volume with Asia - it is critical to the export community and to the high technology sector in particular that the San Francisco Bay Area sustain the capacity to efficiently meet future air cargo demand. With SFO expected to retain its dominant position in international air passenger and international air cargo traffic for the foreseeable future, capacity issues there must be recognized and addressed now to ensure the Bay Areas future economic competitiveness.

 

 

 

 

California is the nations leading agricultural exporter, with $6.5 billion in annual shipments. Nearly 20% of Californias agricultural production is shipped to foreign markets, much of it through the Port of Oakland; nearly 40% of the Port of Oaklands export volume is comprised of agricultural products grown in Central and Northern California. Fruits, vegetables and nuts account for nearly 60% of Californias agricultural exports. When all categories of grape exports   wine, table grapes, raisins and grape juice are combined they constitute the largest single category of California agricultural exports, valued at more the $1 billion.

 

Asia is the states largest regional market for agriculture, absorbing 40% of total California exports by value. The second largest export region is North America, at 29%. Canada and Japan are the states two largest single export markets and together account for a quarter of the states total agricultural exports. Other major markets include Mexico, South Korea, the United Kingdom, Taiwan, Hong Kong, Germany, the Netherlands and Spain. Asia purchases 50-60% of the states exports of fruits, field crops such as rice, and animal products. North American markets absorb a 70% of the states vegetable exports, and Europe a majority of the states exports of nuts.

 

Monterey County is a major exporter of lettuce, broccoli, celery, strawberries, cauliflower, and other valued added food products, principally to Canada, Singapore, Japan, Taiwan, Hong Kong and Mexico.

 

Slow economic growth worldwide and a strong dollar dampened agricultural exports in 2001, but a weaker dollar in 2002 and 2003 may improve export prospects. The U.S. Department of Agriculture expects U.S. international sales of $54.5 billion in 2002. Though a reduction from earlier estimates, this still places U.S. exports above 2001 levels, which in turn exceeded exports in 2000.

 

Overseas markets for California wine, a distinct Bay Area export, are continuing to grow. In the last decade, wine export volumes and revenues have grown by more than 250%. In 2000 U.S. wine exports (over 90% of which come from California) grew 2% by value to $560 million. 2001 exports grew 3% in volume, but declined 1% in value to $541 million. The top markets for U.S. wine (2001) are the United Kingdom ($169 million), Canada ($94 million), the Netherlands (a portal for other European countries, $62 million), Japan ($57 million), Belgium ($27 million), Germany ($13.6 million), and Ireland ($13.5 million). Though U.S. wine exports have grown strongly in the last decade, wine imports continue to hold a 4:1 edge.

 

Overall, international trade plays a key role in the Bay Areas economy. The region (including San Francisco, San Jose and Oakland) ranks as the second largest exporting region in the United States after New York-New Jersey metropolitan area, and ahead of all other areas  including Seattle, Los Angeles, Detroit, Chicago, Houston, Boston, Miami and Philadelphia. San Jose metropolitan area exports alone are larger than 45 of the 50 U.S. states and Bay Area exports are larger than those of all U.S. states except Texas.

 

Trade supports a significant portion of the Bay Areas workforce. Overall, one in five U.S. manufacturing jobs is directly or indirectly tied to exports. A recent analysis by the International Trade Administration of the U.S. Department of Commerce found that an estimated 7.7 million U.S. jobs (7.2% of total U.S. private sector employment) are supported by manufactured exports; of these, 3.3 million were directly in manufacturing, with the balance coming from non-manufacturing support industries such as business services, wholesale and retail trade, and transportation, reflecting the ripple effect that exports have on the economy.

 

According to the same report, California leads all U.S. states in the number of jobs linked to manufactured exports (1.15 million, or 15% of the U.S. total). Of these, 500,000 are directly in manufacturing, representing more than 27% of the States total manufacturing employment (a significantly higher figure than for the U.S. as a whole), and 650,000 are in related non-manufacturing fields. Most important for the Bay Area, more than 35% of manufacturing jobs in the computer and electronics industry, 28% of manufacturing jobs in the industrial machinery sector, and 25% of manufacturing jobs in the electrical equipment sector are export-related.

 

More than half of the Bay Areas exports currently go to Asia, one quarter go to Europe, and 16% go to Canada and Mexico. This pattern has been stable for the last decade, except for significant growth (4%) in the share of exports going to NAFTA. This strong orientation toward Asian markets distinguishes the Bay Area from the rest of California (see Charts B and D). In Asia, Japan, Taiwan, Singapore, South Korea, Hong Kong, China and Australia rank among the Bay Areas top ten export markets. Its leading European markets are the United Kingdom, Germany, the Netherlands, France and Belgium.

 

While important trade opportunities can be found in other regions of the world, the prospects for Bay Area trade and export growth are therefore linked most immediately to the economies of Asia, as well as the European Union and NAFTA. The importance of Asian markets to the Bay Area can be seen in the share of revenues of representative Bay Area companies that are generated by Asia-Pacific sales: Applied Micro Devices (AMD) 28%, Apple Computer 32%, Applied Materials 46%, Autodesk 32%, Intel 40%, Adobe Systems 27%, Applied Biosystems 21%, Cirrus Logic 75%, KLA-Tencor Corp. 47%, Komag Inc. 95%, and LSI Logic 34%. These numbers are likely to increase. From 35% currently, Asia is expected to account for more than half of Agilent Technologies revenue within five years.

 

Bay Area exports are dominated by technology. This weighting toward high technology can be seen by comparing Charts C and E. Global demand for the regions technology products such as semiconductors and semiconductor equipment, computers and computer equipment, software, telecommunications equipment, environmental technology, medical technology and pharmaceuticals and for its technology-related services, has been a driving factor behind the regions economic expansion for the last two decades and accounts for a large share of the revenue of major Bay Area technology companies.

 

For example, in the information technology sector, 71% of the revenue of Applied Materials, the Santa Clara manufacturer of semiconductor equipment, comes from overseas sales. International sales account for a comparable share of revenues of other leading Bay Area technology companies, including Cisco Systems (46%), Sun Microsystems (53%), Hewlett-Packard (58%), Intel (65%), Agilent (60%), and Advanced Micro Devices (66%). Industry-wide, foreign markets account for 77% of all semiconductor equipment sales. Milpitas-based Solectron Corp. provides contract manufacturing, engineering and design services to technology companies worldwide.

 

With operations in Romania, Malaysia, the Netherlands, China (Shanghai and Suzhou), Singapore, Japan, Mexico and the United States, in 2002 61% of Solectrons net sales came from non-US sources.

 

Significantly, international markets account for a similar proportion of sales for major Bay Area biotechnology companies such as Chiron Corporation (53%), Bio-Rad Laboratories (64%) and Gilead Science (73%). Applied Biosystems Group a global leader in genomics and proteomics sells to customers in more than 100 countries.

 

While high technology dominates its export profile, the Bay Area produces a diverse range of products and services. Fremont-based New United Motors Manufacturing, Inc. (NUMMI) exported $23 million in automobile parts and components to Canada and Japan in 2002, and will soon begin producing 15,000 cars for export annually. At the other end of the spectrum, global markets are critical to the Bay Areas film industry, where Marin County-based LucasFilm earns hundreds of millions in global box office revenues from its Star Wars films and from overseas sales of Star Wars merchandise.

 

Legal, accounting, architectural, design and engineering, licensing and educational services figure prominently in the regions export profile. The San Francisco office of the architectural firm Skidmore, Owings & Merrill (SOM), for example, prepared the redevelopment plan for five miles of industrial riverfront in the heart of Shanghai, is designing a $3-5 billion, 128-acre residential district in the city, as well as 10 million square feet of Chinese office space . SOM is also designing a mixed-use development and eighty story tower in Beijing for the China World Trade Center, another 7 million square foot mixed commercial-residential complex in Beijing; and is engaged in similar large scale projects in the Cities of Shenzen and Chongqing. Thirty percent of the San Francisco offices business comes from China.

 

 

 

Air Cargo and California Business

 

Air cargo has been the fastest growing segment of the goods movement industry in the United States in recent years. The growth has been especially strong in the overnight parcel movement segment, led by Federal Express, but also including such companies as UPS, Airborne Express, DHL, Menlo Worldwide (formerly Emery), and the U.S. Postal Service.  One obvious consequence has been the growing burden on regional transportation planners and airports to accommodate truck traffic feeding into cargo flights. 

 

Unlike some segments of the freight industry, much of the ground movement related to air cargo occurs during peak travel periods in the morning and evening.  To meet east coast delivery commitments, for example, aircraft depart from west coast airports in the period around 6:30 to 7:30 p.m.  Because pickup operations end around 5:00 p.m., at close of business, very little time is available to move shipments to the airport, sort the shipments, load air containers, and load the containers on aircraft. Minor delays can impose tremendous costs and possibly force late deliveries all around the country (due to late connections at hub airports). Due to time zone differences, west coast flights are the last to arrive at the hubs.

 

Due to a west coast time zone advantage (3 hours behind east coast), the time pressure is lessened during the morning rush-hour period in California.  Nevertheless, trucks are on the road during peak morning periods to meet start-of-day delivery commitments. 

 

Both Federal Express and United Parcel Service have major operations centers in California. 

 

In the southern part of the state, UPS operates a regional hub out of the Ontario airport, and Federal Express operates a Metroplex (mini-hub) out of LAX.  Both companies offer flights to major hubs out of other airports, including San Diego, Burbank, Long Beach and Orange County. Both companies also operate an extensive network of terminals, from which pickup and delivery vehicles are dispatched, and trucks are routed to airports.

 

In Northern California,   

 

UPS and Federal Express use two methods for transporting shipments to the airports.  One involves filling air containers at the local pickup/delivery terminals and transporting these containers on tractor-trailers. The air containers are typically pre-sorted to allow them to be moved directly to the aircraft.  The alternative is to use smaller shuttle trucks, which are bulk loaded. Bulk loads must be sorted and loaded into containers at the airport. One advantage of the shuttle trucks is that they are eligible to use HOV lanes, provided that two people ride in the vehicle. 

 

Even though air cargo is a fast growing industry segment, it is associated with only a small portion of truck movements. Shippers pay a substantial premium for air freight relative. It is employed only the most critical and highest value freight.  Future growth in overnight freight is unlikely to drastically change the balance between air and ground shipments.  Nevertheless, air cargo is vitally important to the states economy, precisely because it typically involves high-value products or shipments which, if delayed, can shut down production lines or cause businesses to otherwise miss time contract deadlines.

 

Air shipments are inherently intermodal, as few shippers and receivers are directly served by aircraft.  Intermodal transportation has received increased attention since the passage of the Intermodal Surface Transportation Efficiency Act (ISTEA).  All levels of government have since paid closer attention to planning for intermodal freight facilities (FHWA, 1994; California DOT, 1995; GAO, 1996; Eberts, 1998; TRB, 2001). 

 

A number of issues are critical to air cargo ground operations in Southern California, which will be the focus of this paper:

 

         LAX is the third largest airport in the nation, measured in enplanements, and largest as measured in passengers whose trips either originate or terminate within the region. LAX is under extensive pressure to expand its passenger facilities to better serve the current traffic, as well as to accommodate future growth.  This growth, along with expanding freight traffic, places a premium on airport property, along with property surrounding the airport. (LAX currently has the second highest commercial lease rates in the country, behind only JFK in New York; Riggins, 2002). Other airports in the region also face land pressures.  Though freight cargo facilities at LAX are currently separated from passenger facilities, the competition for space will certainly grow in the future.

 

         Truck movements experience significant roadway congestion on the way to, and in the vicinity of, the regions airports, especially LAX.  Unlike conventional freight, air cargo is often on the roads during peak periods. The hub operations of the major air cargo carriers depend on meeting departure schedules in Southern California to keep their entire U.S. delivery network on schedule.

 

         Changes in regional congestion, property constraints and constraints on aircraft landings/departures may force carriers to adopt new operational strategies for moving freight in the region.  Examples of these changes could be: (1) changing the location at which shipments are sorted, (2) changing the number of splits (i.e., groupings) into which shipments are categorized, (3) offering direct flights from more or different airports, (4) connecting pickup/delivery terminals to different airports.  The LAX Master Plan is still in flux, and it is unclear whether the airport will be expanded to accommodate future growth in freight, though expansion has been proposed.

 

         The region is currently contemplating a variety of changes in its air system.  This includes opening or expanding airports (e.g., March, Palmdale, El Toro, Victorville), some with a specific focus on freight.  In addition, the region faces competitive pressure from other west-coast airports, such as San Francisco, Oakland and Seattle-Tacoma (Thuermer, 1997; Parezo, 2002).

 

Other changes being studied include truck-only-lanes, Maglev/high-speed rail access to airports (possibly accommodating freight), and conventional rail transportation.

 

 


2. INDUSTRY STRUCTURE

 

The air freight industry can be segmented into five categories: (1) integrated freight carriers, (2) non-integrated freight carriers, (3) passenger/freight carriers, (4) postal services and (5) freight forwarders.   To put these categories in perspective, Table 1 provides the total ton-kilometers of freight carried by the 15 largest carriers in the world.

 

Table 1.  Largest Cargo Airlines

(Million-Metric Ton-Kilometers of Freight)

 

Federal Express                                                     10,809

Lufthansa                                                              7,115

Korean Air                                                             6,491

UPS                                                                       6,318

Singapore Airlines                                                   6,020

Air France                                                              4,980

Japan Airlines                                                         4,607

British Airways                                                       4,564

Cathay Pacific                                                        4,108

KLM                                                                       3,964

United Airlines                                                        3,694

Cargolux                                                                3,523

Northwest Airlines                                                  3,234

American Airlines                                                    2,780

Nippon Cargo                                                         2,186

 

Source: International Air Transportation Association

 

Of the top 15 cargo carriers, 11 also carry passengers (some, such as United, do not even operate all-cargo aircraft).  These passenger airlines depend on freight forwarders and postal systems to generate traffic.  The list is dominated by carriers with strong international passenger operations, reflecting the importance of trans-oceanic shipments in the air cargo industry.  Similarly, strong international airports also play a major role in freight transportation.  The number 1 and number 4 cargo carriers (FedEx and UPS) are the only integrated carriers on the list.  The only non-integrated freight carriers, Cargolux and Nippon Cargo, rank 12 and 15.

 

Integrated Carriers

 

Federal Express (FedEx) and United Parcel Service (UPS) are the dominant companies in domestic air freight (Pagano, 2001).  Both provide an integrated door-to-door service, merging four principal elements: (1) ground fleet of pickup/delivery trucks, (2) terminals for sorting and processing freight, (2) long-haul truck fleet for moving freight between terminals, and (4) an air fleet for moving freight between airports.  Both companies operate internationally, and operate a network of hub airports for processing freight.   Comparing the two, FedEx is somewhat stronger in the overnight air segment of the business, whereas UPS is stronger in ground transportation.  Total revenues for the major American integrated carriers (including all business segments) follow in Table 2.

 

Table 2.  Revenues for American Integrated Carriers

 

United Parcel Service         $29,771  (2000)

Federal Express                 $19,629 (2001)

DHL                                   $ 5,100 (1999)

Airborne                             $ 3,276 (2000)

CNF (Emery Parent)           $ 5,572 (2000)

BAX Global                         $ 2,097 (2000)

    

Source:  Hoovers Online for all financial statistics in report.

 

Due to their smaller size, DHL, Airborne, Emery and BAX operate somewhat differently than UPS and FedEx.  For instance, DHL has specialized in international freight and, therefore, it provides less extensive service domestically (for instance, fewer service options).   The German Post Office recently acquired a majority stake in DHL, apparently to gain a foothold in the American market.  BAX Global, the smallest carrier shown, is a hybrid between an air carrier and a freight forwarder: it utilizes passenger airlines for much of its freight.  BAX, along with Emery, focuses on heavier shipments than UPS and FedEx.  Airborne offers similar services as UPS and FedEx, but has focused on negotiated arrangements with major shippers, with more limited service for the general public.   Airborne, BAX and Emery are all financially weak.  Emery in particular suffered in the last year, due to the temporary grounding of its fleet (a consequence of maintenance concerns), and the loss of a major US Postal Service contract to FedEx. 

 

Non-Integrated Freight Carriers

 

The non-integrated carriers are considerably smaller than the integrated carriers.  They are differentiated from integrated carriers by: (1) serving narrower geographic markets, (2) focus on larger and more specialized shipments, and (3) emphasis on acting as a sub-contractor to other carriers.  The largest non-integrated carriers are Cargolux (Luxembourg) and Nippon Cargo (Japan), based on kilometer-tons carried. Within the United States, Evergreen International ($550 million revenue in 2001) and Atlas Air ($790 million revenue in 2001) are the largest.    Kitty Hawk, Gemini and Polar (recently acquired by Atlas) are other major cargo airlines. 

 

The non-integrated carriers serve two basic functions.  First, carriers like Cargolux, Nippon and Evergreen provide scheduled service on major traffic lanes, which can be utilized by shippers or freight forwarders as needed.  Second, carriers like Atlas and Gemini provide outsourcing, carrying contracted freight for freight forwarders and other airlines.  This can either be a long-term contract (either for an entire aircraft or a portion of an aircraft), or a one-time charter.   Within the outsourcing category, some carriers provide specialized services, such as small feeder aircraft (e.g., Ameriflight), or large military-styled aircraft designed to carry oversized loads (e.g., Volga-Dnepr). 

 

Because the freight airlines generally do not provide a complete transportation service (e.g., they do not operate ground transportation), and because their shipments tend to be large, they are much less capital-intensive than integrated carriers.  That is, they have fewer assets because they can operate their fleets without investing in terminals for sorting and processing freight.  They also do not require extensive staffing, because terminal operations are limited, truck drivers are not needed and fewer customers are served.  As a consequence, they are much smaller businesses than the leading integrated carriers (FedEx and UPS). 

 

Combination Passenger/Freight Carriers

 

In addition to transporting passengers, most airlines also provide freight and mail services.  Usually this entails selling excess space in the belly of passenger aircraft (especially 747, DC10 or other larger aircraft).  Some passenger carriers (such as Korean Air and Northwest Airlines) also operate all-freight aircraft most commonly on trans-Pacific and trans-Atlantic routes.  However, some major carriers of freight -- United, American and Delta -- rely entirely on passenger aircraft.  According to Dahl (2000), more than half of the worlds freight moves on passenger flights.  Overall, as indicated in Table 1, 11 out of the top 15 cargo airlines are also passenger airlines.  These airlines carry well over half of the worlds freight.

 

To service freight, passenger/freight airlines typically form partnering arrangements with freight forwarders, trucking companies, postal services and couriers.  The airlines typically do not operate their own fleets for pickup and delivery, and do not operate local terminals for sorting and processing shipments.  Instead, they rely on third-parties to assemble shipments, which are than delivered to airport terminals.  The passenger carriers focus on providing the air transport portion of the service.

 

Postal Services

 

The US Postal Services is the largest in the world, with $64,540 million revenue in 2000 (more than twice the revenue of UPS). Although USPS is still part of the US government, it operates without subsidy. 

 

The largest European postal service is Deutsche Post AG (German Post Office), with $30,798 million revenue in 2000.  Though the German government holds a majority stake in Deutche Post AG, the company is increasingly focused on private markets, and international expansion through investments in companies like DHL.  TNT Post Group in the Netherlands was the first publicly traded postal system.  It has expanded into express markets (including the US), and reached sales of $9,358 million in 2000.

 

Although the US Postal Service (USPS) has offered overnight mail services for some time, it has never operated its own airline.  Instead, it has relied on private carriers (Emery and Kitty Hawk, and more recently FedEx), and passenger airlines to provide its air services.  In this sense, the USPS functions more like a freight forwarded than an integrated freight carrier.  USPS is also noted for its extensive pickup and delivery services.  It is the only transportation company that visits almost every US address on a daily basis.

 

Although the USPS is the largest transportation organization in the world, it only accounts for a modest fraction of the air freight shipped in this country (about 10% of weight).  This is because their air shipments tend to be very small (envelopes and documents), and because much of the mail shipped in the US travels in ground vehicles. 

 

Freight Forwarders 

 

Freight forwarders do not ordinarily operate airlines. Instead, they are wholesale purchasers of airline capacity.  By providing ground feeder services and specialized support services (e.g., assistance in clearing customs and inspections), forwarders are able to resell airline capacity to shippers.  Freight forwarders also frequently assist their customers through warehousing, order fulfillment and other types of logistical support.  They are especially prominent in the vicinity of the major international gateway airports, such as LAX, Miami and John F. Kennedy (New York), and in the vicinity of major sea ports.  According to Clancy and Hoppin (2001), forwarders serve 80% of international cargo traffic.  Forwarders frequently serve both ocean and air shipments. 

 

The largest freight forwarders operate internationally and operate pickup and delivery services, though many companies work on a small scale in a single location, utilizing partnerships with foreign counterparts.  Danzas Group (subsidiary of Deutche Post) is the largest in the air forwarder market, with $7,805 million revenue in 2000.   Some large freight forwarders, such as Eagle Global Logistics ($1,861 million in revenue), have contracted for dedicated air routes and pickup and delivery, to provide a coordinated door-to-door transportation service.  Traditional freight forwarding is strongest in large shipments (bigger than typical packages), and international shipments. 

 

In another class, some freight forwarders specialize in very urgent next-flight-out service.  Here the emphasis is on domestic shipments for which next-day service is inadequate.  This class of forwarder has developed partnerships with airlines and couriers for door-to-door service, especially within the United States.  Examples include UPS Sonic Air subsidiary, FedEx SameDay service, and NextJet.

 

 

Freight Airports in the United States

 

The 15 largest freight airports in the United States, measured in total metric tonnage.  The largest airport (Memphis) and the sixth largest airport (Louisville), owe their size to hub operations of FedEx and UPS.  Neither airport is located in a highly populated region. Nor are they international gateways. They were selected by UPS and FedEx as hubs because of their central location relative to US population, minimal snowfall, and attractive labor environments.

 


 

The second largest freight airport (LAX), the fourth (JFK) and the fifth (Miami) are all major international gateways, principally serving Asia, Europe and South America, respectively.  Their size is not so much due to FedEx and UPS traffic as it is due to international airlines especially passenger airlines that also carry freight.

 

The third largest airport Anchorage is a special case.  Its size is largely due to its ability to serve as a refueling stop for Asian/North American traffic.  The remaining airports (numbers 7 through 15) are large for either of two reasons: (1) location of a domestic freight hub, or (2) location within a highly populated region. 

 

Services in Southern California

 

Freight service is available through all of the regions major airports LAX, San Diego, Orange County, Ontario, Burbank and Long Beach.  However, LAX dominates the market, with Ontario and San Diego well behind (Orange County, Burbank and Long Beach serve a small fraction of LAXs volume).  In 2000, LAX served 2.25 million tons of freight, a factor of 4 larger than Ontario and San Diego (sources: LA World Airports, Port of San Diego).  

 

FedEx has its largest Southern California operation at LAX, with direct flight service to about 10 cities across the United States.  Despite its size, FedEx accounts for just 18.2% of the regular freight at LAX (even less if mail is factored).  UPS operates its west coast hub out of Ontario, where it accounts for 78% of the airports freight traffic (not counting mail).   Despite this high percentage, traffic volumes for UPS Ontario hub and FedEx LAX Metropolex are similar.  Both carriers provide limited service out of the other four major airports (principally connected to the carriers hub airports).

 

Table 3 lists the top 10 LAX carriers by tonnage.  Similar to the international ranking in Table 1, the list is dominated by passenger carriers, with just three all-freight carriers (Federal Express, Emery and Atlas) appearing in the top 10.  Major domestic passenger airlines United, American, Northwest and Delta rank 2, 4, 5 and 6.  Three major foreign passenger carriers also rank high: Korea Air (3), Asiana (8) and Singapore (10).  The list is reflective of the international strength of LAX.

 

Table 4 provides the top 10 all-freight carriers, which are dominated by FedEx.  The five largest integrated carriers all appear on the list (FedEx, 1; Emery, 2; DHL, 4; Airborne, 6; and UPS, 10).  Collectively, the top 10 all-freight carriers only account for 33% of the total freight volume at the airport (the remainder being predominantly passenger airlines). 

 

Table 5 shows the dominance of UPS among the top 10 carriers at Ontario.  Other integrated carriers FedEx, BAX, Emery and Airborne also operate from Ontario, and are ranked 2 to 5.  DHL, with its international focus, does not.  Collectively, the integrated carriers account for nearly 98% of the freight tonnage.  The remaining 2% is roughly evenly divided between small non-integrated freight carriers (Ameriflight and Ryan) and passenger carriers.  It is clear from these statistics that Ontario is almost exclusively focused on the domestic freight market.   

 

Elsewhere in the region, Burbank, Long Beach and Orange County provide limited freight service, principally FedEx and UPS flights to domestic hub airports.  San Diegos freight volume is similar to Ontarios, but it is not concentrated with a single carrier.  In addition to UPS and FedEx, San Diego is served by BAX, Emery, Evergreen and Ryan, as well as a large number of passenger airlines.  Other smaller airports (such as Palmdale, Palm Springs, and Oxnard) are largely limited to feeder service to the larger airports in the region.  

 

 




Tsao (1998) recently completed a comprehensive survey of air cargo in California, and provides an extensive data set on air cargo freight movements, and Mercer (1995) provides additional data on air cargo facilities in Southern California (along with other modes of cargo transportation).  An extensive study of truck transportation in Southern California was completed in 1988.  Though the study is now dated, it provides useful information regarding the distribution of trip ends throughout the region and the distribution of truck travel by time of day.  Wilbur Smith (1990) studied truck traffic in the vicinity of LAX in particular, and found that it was a relatively small contributor to overall congestion in the vicinity of the airport.  Lastly, Hall and Partyka (1991) provide information on the linkage between economic activity and truck traffic in the region, including traffic related to air-express shipments.

 

 

Services in Northern California

 

The Port of Oakland operates the Oakland Metropolitan International Airport, which covers an area of approximately 2,580 acres, and is located nine miles from downtown OaklandOakland Metropolitan International Airport has a 10,000-foot fully instrumented main runway that can be extended to 12,500 feet. Its terminal complex is capable of servicing up to 2,500 passenger arrivals and departures per hour.  A separate International Arrivals Building has customs inspection and baggage claim facilities for handling 500 passengers per hour.  The runways, taxiways, and plane positions at both cargo and passenger terminals have jumbo jet capacities.  Primarily general aviation aircraft also uses three other runways.  Operations of these general aviation runways are controlled from a separate tower. 

 

Far less congested than SFO, OAK is also more centrally located for the East Bay. Oakland International handled 11,416,584 passengers in 2001. 

In 1997, OAK saw over 10% growth in cargo volume, which made it the 14th largest air cargo operation airport in the country.  It is a distribution center for Federal Express, UPS, Airborne Express, Burlington Air Express, and Menlo Worldwide. Eleven commercial airlines currently provide more than 1,200 non-stop direct or connecting flights weekly to destinations in the United States, Canada, Europe, and Mexico.

 

 

 

Industry Interviews

 

A series of interviews was completed with trucking companies, freight forwarders and airlines, including the three largest airlines serving LAX and the largest serving Ontario (Appendix).  Interviewees were asked to cite the advantages and disadvantages of utilizing LAX for freight cargo, and to offer their suggestions to improve ground transportation of freight.  We summarize the findings here, and provide more details on integrated carriers in the following chapter.

 

From the carrier perspective, LAX offers numerous advantages.  First, carriers such as United and Korean Air, offer both passenger and freight services. Because LAX is the focal point for international passenger traffic in the region, and because LAX is also a major passenger hub for United, it would be very difficult to operate anywhere else.  Secondly, LAX has a strong infrastructure to support cargo operations, including air freight terminals, runways for larger aircraft, freight forwarders, trucking companies, customs, and Department of Agriculture inspections.  Third, LAX is the most centrally located airport relative to the regions population and employment.  Last, one carrier believed that it was easier to retain employees at LAX, due to its location. 

 

From the perspective of ground carriers and forwarders serving the airport, LAX offers similar advantages, most importantly an ability to accommodate larger aircraft, a central location relative to customers and flight connections to many destinations.  Customs facilities, an ability to accommodate larger aircraft and on-time performance were also cited. 

 

Interviewees seemed satisfied with on-time performance at LAX, in most cases citing it as neither an advantage nor disadvantage. 

 

The biggest disadvantages of LAX are the costs of leases, crowding and traffic congestion.  These disadvantages are a byproduct of LAX central location, which has limited room for constructing new facilities.  It is also a byproduct of delays in implementing a master plan for airport expansion.  In general, interviewees were dissatisfied with the state of the facilities at LAX, citing difficulties in adding to their warehouses, and lack of planning in separating freight from passengers.

 

Interviewees were very concerned about traffic in the vicinity of LAX, which is among the worst in the LA region.  Despite these disadvantages, the interviewees did not view Palmdale to be a viable alternative: the reduction in congestion, crowding and cost of operation do not adequately compensate for its remoteness.  And although the Palmdale airport is located in a less congested area, trucks would need to pass through considerable congestion in the LA region in order to reach Palmdale.

 

Freight Forwarders

 

As an illustration of the how freight forwarders are tied to freight-serving airports, Figures 2 and 3 plot their Southern California locations (based on the Air Cargo World forwarder directory).  The great majority of these are located in the immediate vicinity of LAX, to the south and the northeast.   In strong contrast to integrated carriers, forwarders do not spread their facilities throughout the region.  This can be attributed to the relatively large size of their shipments (making it less important to consolidate loads close to the shipper/receiver), and due to forwarders reliance on trucking companies for providing ground transportation service (which operate their own distinct terminals).  The forwarders themselves are not positioned to serve airports other than LAX. 

 

To put this further in perspective, Figure 4 provides site plans for the LAX operational area, as it exists today.  Freight operations fall in two general areas: along Imperial highway on the south of the property (Figure 4a, including FedEx and the Imperial Cargo Complex), and along Century Boulevard in the north-east corner of the property (including United, Figure 4b).  Fortunately, the southern facilities are largely isolated from passenger terminals, minimizing car/truck conflicts.  The Century Boulevard facilities are more problematic, because the street is a main access route to passenger terminals, and because of their proximity to hotels and offices.    Attention needs to be placed on facilitating truck traffic along Century Boulevard, and moving as much freight traffic as possible to the south side of the airport property.  The LAX Master Plan proposed four concepts, all of which include expansion of cargo facilities along Imperial Boulevard.  Two of the concepts also provide expansion along Century Boulevard. 

 

In planning for expansion, consideration should be given to accommodating forwarders, which are generally located off of the airport property.  In particular, it would be beneficial to develop strategies by which forwarders and air cargo terminals are located in close proximity, away from passenger traffic.  This may include development of off-airport property to the south of Imperial Boulevard.

 


 

INTEGRATED CARRIER OPERATIONS

 

FedEx and UPS are similar in that they provide an integrated, door-to-door, service, meaning that they own and operate fleets of ground vehicles, fleets of aircraft, and terminals for consolidating and sorting shipments.  They are also similar in that they have focused on the document/package business, carrying shipments up to 150 pounds.  DHL, Airborne, and Emery provide similar services and operations, on a smaller scale, and within market niches.  

 

Integrated Carrier Operations

 

Integrated carriers price their services according to delivery commitment, ranging from  premium (early-morning) delivery, to delivery several days in the future.  Depending on the distance from origin to destination, the day shipped and the service selected, a shipment may or may not travel by aircraft.   Because the cost of ground transport is substantially less than the cost of air transport, trucks are preferred whenever sufficient time is available.  For instance, an early morning delivery could be handled entirely by truck if the origin and destination are sufficiently close.  Even a coast-to-coast 2-day shipment can travel by truck if shipped on a Friday.   These choices are generally invisible to the customer, who is unaware of the routing.

 

Despite this flexibility, much of the system design is driven by the next-day, morning (generally 10:30), segment of the business.  Meeting this deadline is especially challenging for shipments that originate in the west coast and terminate in the east cost.  With a typical drop-off time of 5:00 p.m., just 14 hours are available from pick-up to delivery.  Within this time, the following activities take place.

 

Pickup:   Packages/documents are collected from shippers in four ways: (1) at customer locations, (2) from drop-boxes, (3) from authorized service centers (e.g., a Kinkos store), or (4) from carrier staffed centers.  A customer pickup can either be on a regular schedule, or be on-call (phoned in on the day the service is requested).  A carrier staffed center can either be an office or a terminal (thus, eliminating one step in transportation). 

 

As with an ordinary mailbox, drop-boxes have posted pick-up times, which vary depending on distance from the airport and anticipated truck routing.  Service centers additionally have specified hours of operation, though their pick-up times tend to be later than drop-box times.  Service centers located at airports have the latest pick-up times, because the customer handles transportation to the airport.

 

Stations/Terminals:  Within larger regions carriers operate multiple stations/terminals, each of which serves a local territory.  Each of these local terminals is the base for a fleet of pickup/delivery vehicles, and each terminal provides facilities for sorting and processing shipments.  Some terminals are served by a single airport, while others are served by two airports (a smaller nearby airport and a more distant major airport, with more extensive service). 

 

Depending on the location, pickups may be sorted prior to leaving the terminal, according to airport, destination or class of service.  As shipments are sorted, they are either transferred in bulk into larger trucks or, alternately, loaded into air containers and then loaded into trucks.  Trucks generally travel non-stop to their airport.  In some cases the terminal is adjacent to the airport, eliminating the need for this transportation step.

 

Airports:   We distinguish between five types of airports in our discussion.  A national hub is the highest class of airports, serving aircraft from multiple origins and destinations located throughout the country.  It provides connectivity between most domestic origins and destinations with a single cargo transfer.   A regional hub also serves aircraft from multiple origins and destinations, but is limited to a section of the country (e.g., the west coast).  A major airport is the largest airport within a large metropolitan area, potentially providing direct service to other major airports in addition to hubs (a major airport could also be a hub).  A local airport is a secondary airport within a larger metropolitan area, or the only airport within a smaller metropolitan area.  It provides jet service to hub airports only.   Last, a rural airport is served by small aircraft (often prop planes), which provide a feeder service to other airports.  Within the LA region, LAX is a major airport for FedEx and Ontario is a regional hub for UPS.  Burbank, Long Beach and Orange County also act as local airports.  Memphis is a national hub for FedEx and Louisville is a national hub for UPS. 

 

Air shipments normally pass through two or three airports on their journey: one near the origin, one near the destination and possibly a hub airport.  In sparsely developed areas, a shipment may also be served by a rural airport. 

 

Bulk loaded trucks are frequently re-sorted at the airport according to destination, with varying levels of granularity.   At a minimum, shipments must be sorted by airport-destination if flights are scheduled to multiple destinations.  In some cases shipments are sorted into finer categories.  This could entail separating lower classes of services (especially 2-day or 3-day), which could be transported by truck or by later aircraft, or this may entail sorting shipments by final destination.  Ultimately, shipments must be loaded into aircraft containers, which are subsequently loaded onto aircraft (occasionally, depending on aircraft, shipments are also bulk-loaded in the aircraft).

 

Hub Airport:  The hub airport receives aircraft from multiple origins, and loads shipments onto aircraft for multiple destinations.  To accomplish these tasks, some containers must be opened so that individual shipments can be sorted.  These are then reloaded into containers and transferred onto outbound aircraft.  Some containers arrive pre-sorted by destination, so they do not need to be opened at the hub. 

 

The transportation process from hub airport to location terminal/station mirrors the process from local terminal to hub airport.

 

Delivery:  Deliveries occur at the ultimate destination, and not through service centers or drop boxes.  This means that more locations are served for delivery than pickup, that locations are more spread out, and that deliveries are more time consuming.  Whereas most pickups occur late in the day, deliveries tend to be spread from 8:00 a.m. until about 3:00 p.m.  The drivers day is approximately divided by class of service: prior to 8:00 a.m. for premium, 8:00-10:30 for regular next day, 10:30 3:00 for discounted next day, and 10:30 4:30 for 2-day or 3-day service. 

 

Effects of Service Classes

 

By having multiple service classes, carriers can better utilize their aircraft, truck and personnel resources.  For instance, aircraft can make multiple roundtrips each day, with separate trips for next-day and 2-day/3-day service.  Delivery trucks can also be more productive throughout the day, keeping drivers busy in the 10:30 to 3:00 time period, handling shipments that do not require early delivery. 

 

Multiple service classes also add considerable complexity to scheduling drivers and aircraft and sorting shipments.  A driver may need to repeatedly visit a building or an area to accommodate the different classes of shipments delivered.  And shipments must be sorted into more categories and sometimes stored for later departing aircraft.  Aircraft schedules become more complex because they are used for multiple trips each day (daytime trips are used to accommodate 2-day service). 

 

 

CONCLUSIONS AND RECOMMENDATIONS

 

Southern California is served by a system of airports, including LAX, Ontario, San Diego, Orange County, Burbank and Long Beach, as well as many smaller airports.  Freight traffic, like passenger traffic, is dominated by LAX.  This is because LAX is the only airport that has the facilities and schedules to serve international traffic (Murphy et al, 1989, present criteria).  It is a major gateway connecting Asia to the United States.  Ontario also serves significant traffic because UPS uses the airport as its regional hub.  San Diego serves significant traffic because it serves a large region.   All other airports have minimal freight traffic, largely limited to integrator traffic to domestic hubs. 

 

Although Palmdale, March Air Force Base and Victorville have been proposed as freight airports, they are not well positioned to accept a large portion of the traffic that currently uses LAX.  Over half of the freight traffic through LAX travels via passenger airlines.  Much of this traffic also travels via international airlines.  These freight operations could not be relocated unless passenger operations are also relocated.  Even for domestic operations, these sites are far from optimal, due to their remote locations.  Their use as a ground/air hub would inevitably increase trip lengths, leading to more truck traffic and increased difficulty in hitting time commitments.   

 

Because LAX, and the west side of Los Angeles, have become very congested, it would still be attractive to shift some of the freight traffic to other airports.  This might be accomplished by:

 

1)                  Redirecting domestic freight traffic to local airports, or creating major integrator operations at other airports, such as Long Beach or Ontario.  Domestic shipments are less dependent on proximity to passenger airlines, and are the most easily relocated. 

 

2)                  Increasing international passenger and freight operations at a second airport in Southern California.  At the moment, San Diego is the closest to filling this role, though it far smaller than LAX.  By further developing San Diego, traffic that would otherwise travel from San Diego to LAX could stay in the San Diego region.  Ontario is also a potential candidate for the future, as it currently has the best facilities for accepting additional traffic, and because it is located in the vicinity of a growing number of freight distributors.

 

Despite these possibilities, LAX will likely attract the majority of the regions freight traffic far into the future.  No other airport is comparable in terms of the scope of facilities, scheduled service and central location.   Therefore, considerable attention should be placed on roadway access, and possibly the separation of freight and passenger facilities for smooth traffic flow. Because of its special features, international traffic is the least likely to move to an alternate airport.  Because passenger and freight are interdependent in International travel, LAX will likely retain its current position as the focus for freight.

 

Fortunately, LAX segregates much of its freight facilities from its passenger facilities.  Focusing developing on the south side of the property will meet this objective.

 

 

 

6. IMPLEMENTATION

 

To reduce ground freight traffic, economic incentives should be provided to encourage integrated airlines to serve as much freight as possible from local airports.  This may include governmental financing for ground access infrastructure, and provide facilities at attractive rents.  Facilitating off-airport development of forwarder facilities on the south side of LAX and in the vicinity of Ontario and San Diego airports could also be advantageous.  In planning for a regional air system, consideration should be given to promoting a second international airport, with a combination of freight and passenger services, either at Ontario or San Diego.

 


The Port of Oakland, an independent agency of the City of Oakland, is the third largest container-ship port on the West Coast.  The Port has approximately 680 acres of developed terminal area, served by 31 container cranes, including 15 of the Post-Panamax type, and 28 deep-water berths with a total of 21,784 linear feet of berthing length.  Another $700 million in new projects, including new terminals, are currently under planning and construction.  The fourth largest seaport in the nation, the Port of Oakland handles 98% of all the containerized cargo that passes through Northern California ports. 

 

Located at the terminus of three transcontinental railroads and four interstate highways, the Port of Oakland is a key West Coast intermodal connection and the hub of Northern California's distribution system.  The Port handled the equivalent of 1,707,827 twenty-foot containers in 2002 (TEU Containers).

 

The two most important export originating metropolitan areas in California are San Jose and Los Angeles-Long Beach.  In 1999, they accounted for over $52 billion in exports, 51% of the States export production.  The Bay Area is also a major exporter, with exports representing 17% of the Bay Areas gross regional product, twice the national average.  After a decline in exports starting in 1996 due in part to Asian economic problems, exports originating from the Oakland MSA increased significantly between 1998 and 1999, from $6.26 billion to $6.71 billion.  High-tech manufactured goods that include electrical components and computers dominate State exports.

 

The growth of Bay Area trucking has been fueled by the distribution needs of the regions industry and agriculture.  Due to the high volume of ship container traffic from the Port of Oakland and the widespread use of advanced management techniques, virtually every major trucking firm in the nation has at least one terminal in the Bay area, and there are over 1,000 registered trucking carriers in the East Bay offering overnight delivery service to major California cities.

With this extensive internal transportation network, the Bay Areas already high level of international and domestic trade is constantly growing.  In 1993 the Bay Area exports totaled $19.7 billion and in 1999 totaled $44.0 billion, signifying a 123% increase.  International trade totaled $105.5 billion for the region in 1996, with the top 25 companies in the Bay Area seeing international revenues of more than $67.5 billion.  The fastest growing exports for the region in 1996 occurred mainly in the high tech sector with exports of electronic integrated circuits reaching $11.1 billion.  This high percentage of high tech exports, which also includes semiconductors and computers, exemplifies the regions comparative advantage in this sector.

 

 

 

 

California would be the seventh largest economy in the world, if it were a nation. Efficient goods movement is crucial to Californias economy. Air cargo consists predominantly of high-value, time-sensitive or time-definite goods, e.g., electronic equipment, emergency shipments, overnight packages, etc. Timely delivery of these goods has become an important element of many manufacturing and service operations in California. Therefore, the air cargo industry is a vital part of the states economy. The continued ability of the states air cargo industry to serve the other industries in the state, and the states ability to capitalize on the forecast growth of air cargo routes between the Pacific Rim countries in Asia and North America, are essential to the prosperity of California.

 

Given the increasing importance of air cargo to Californias economy, it is imperative to understand the role of air cargo in California. There are many important aspects of Californias air cargo market that deserve further study. A more detailed discussion of air cargo activities in California can be found in The Role of Air Cargo in Californias Goods Movement (Tsao, 1998).

 

This chapter focuses on the total weights of air cargo enplaned or deplaned at the top ten California cargo airports. These ten airports are among the sixteen largest passenger airports in the state.

 

The Worldwide Airport Traffic Report published by the Airports Council International includes air cargo data for the ten California airports. Table 5-1 presents the total weight of air cargo enplaned or deplaned at these airports in 1990 and 1996, as well as the percentage changes between the two years.

 

It is clear from Table 5-1 that the growth of air cargo at the ten airports has been very fast. Seven out of the ten airports experienced growth higher than 50 percent in the six years between 1991 and 1996. Three of these seven experienced more than a doubling of their total air cargo tonnage, with growth at Orange County, Oakland and Sacramento airports of 952 percent, 189 percent and 121 percent, respectively. The average annual growth rate for Orange County Airport during the six years was well over 100 percent. The ten airports experienced a combined growth rate of 58 percent over the six years, giving an average annual growth rate of almost 10 percent.

 

Table 5-2 shows the same data aggregated at the regional level, using the regional definitions discussed in Chapter 2. Air cargo growth in all four regions exceeded 50 percent during the six years, while air cargo in the two smaller regions grew faster than in the two larger regions.



[1] The Boeing Company, World Air Cargo Forecast: 2002-2003 http://www.boeing.com/commercial/cargo/sitemap.html

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