Vol. 8 No. 107                                                                  WE COVER THE WORLD                                       Wednesday October 7, 2009

Rise Of Fall In Air Cargo

Ralf Auslaender
Managing Director
leisure Cargo

FT:   How has 2009 been so far?
RA:  “This year has been quite challenging although in total tonnage our
volumes have increased maybe 15%.
     “But of course if the next question is, how are yields—that is another story.”
FT:   What lies ahead for Q4?
RA:  “Our plan in the marketplace is to stick to what we set up long before
the financial meltdown and that is running a first class air cargo
operation that includes being close to our customer and hands on all
the way along with minimal staff and overhead and maximum service.
FT:    How does early 2010 look?
RA:   “The first part of every year is never much to write home about.
     Holidays are over and winter has set in to many parts of the world.
     “Add to that the general business malaise driven by ongoing reports saying things are getting better that many wait to see.
     “My view is that Q2 next year will be the real testing ground at which time we will see the real tangible signs of recovery so many are longing to see.
     “As said at the top, volumes are there.
     What is next is that rates stabilize and business gets back to a solid footing.
     “There may be ground to make up but all through this year we have managed to remain profitable despite the downward pressure.
     “Now we will continue to manage our business looking forward to the certain rebound next year.”
Geoffrey Arend

Part I
Part II
Part III

Why Ecuador Flowers

     Cut flowers are perhaps one of the best examples of how transport costs and comparative advantages interact to generate valuable export opportunities for LAC.
     Cut flowers fit perfectly with the definition of time-sensitive goods.
     According to some of the most respected industry estimates, roses, for instance, can last up to 14 days after harvesting if handled properly.
     Assuming a modest retail shelf life expectancy of seven days, any shipping time that goes beyond seven days (including both domestic and international transportation) imposes a heavy depreciation cost to traders.
     Proximity is definitely an advantage.
     Beyond being time-sensitive, cut flowers are also labor intensive, given that the harvest cannot be fully mechanized, and natural resource intensive, since the quality and availability of land, as well as the characteristics of the climate, are key factors for the success of the industry.
     These characteristics, coupled with recent development in air transportation and refrigeration, have opened opportunities for trade, particularly for North-South trade, in a fast growing world market whose size is estimated between US$40 and US$60 billion annually, 80 percent of which is concentrated in the U.S. (15 percent) and the EU (65 percent).
     The search for land and cheaper labor to cater for this large and growing demand has been forcing production to move south to developing countries in Asia, Africa and in LAC.
     As proximity would indicate, the U.S. market has been the focus of the region’s exports. In 2005, approximately 82 percent of U.S. imports of cut flowers originated in the Western Hemisphere, with Colombia and Ecuador accounting, respectively, for 59 and 18 percent of the total.
     The story of Ecuador’s success in this industry is marked, on the one hand, by a perfect match between product characteristics and the country’s factor endowments, and on the other, by a constant effort to overcome the difficulties created by the country’s precarious infrastructure.


     Quito the capital of Ecuador is currently served by the Mariscal Sucre International airport (left) operated by a joint venture called Corporacion Quiport SA (Quiport) a partnership of Aecon, Andrade Gutierrez Concessoes of Brazil, the Airport Development Corporation of Toronto and HAS Development Corporation of Texas.
     The New Quito International Airport (right) that will replace Mariscal Sucre International Airport with expanded cargo and reefer operations and free trade zone and new passenger facilities is being built in Tababela Parish, about 20 Km east of Quito, Ecuador. Work on the facility began in 2006 and is expected to be completed by October 2010.

     The climate (an altitude higher than 2,000 meters above sea level in the equatorial zone), the availability of rich volcanic soils, low labor costs and the relative proximity to the U.S. served as a perfect platform for floriculture to develop.
     Yet, the shortcomings of Ecuador’s infrastructure, as well as the failures to acquire the necessary expertise, meant that the development of the industry was a lengthy and tortuous process.
     Ecuador’s first attempt to export fresh flowers occurred between 1963 and 1977, but success was limited given the poor air transportation links to the U.S. market, a lack of technical know-how, and an absence of related industries.

NOTE 1:   The industry was revitalized in 1983, and in the two decades that followed, the area of cultivated flowers grew to approximately 5,000 hectares, 60 percent of which was occupied by roses (Expoflores).
NOTE 2:   Between 1997 and 2006, exports grew by 12 percent a year from $131 million to $436 million. Cut flower exports are now the country’s third largest non-oil source of foreign currency, only behind bananas and shrimp.
NOTE 3:  The bulk of Ecuador’s fresh flower exports goes to the U.S., which accounts for 58 percent of total sales or 63 percent of the total volume. Russia is the second most important market, but lags well behind the U.S.

     Apart from endowments and proximity, Ecuador’s cut flower exports have been benefiting from a preferential access to the U.S. market (zero tariffs), granted initially by the Andean Trade Preferences Act (ATPA) ratified in 1991 and later on extended by the Andean Trade Preferences and Drug Eradication Act (ATPDEA) (2002). The ATPDEA was supposed to expire in June 2007, but was extended by the U.S. Congress until December 2008. Before 1991, exports of flowers were penalized with tariffs ranging from 6.4 to 6.8 percent.
     Cut flowers are perishable goods; therefore, the success and the risks of the industry depend on how well integrated the different parts of the supply chain are to guarantee a delivery of a product whose quality is time-sensitive. A full description of the supply chain of this industry can be found in Vega (2008). The Table below shows the length of time in different parts of the supply chain in order to provide the reader with an assessment of where the risk may be. The table was completed using published information and complemented by a questionnaire sent to the individuals responsible for operations at major cargo agencies in Quito. As can be seen, there is a substantial variation and, therefore, uncertainty in shipping times. From the moment of harvest until the time the product arrives at the U.S. retailer, the trip can take anywhere from 441⁄2 hours to almost 13 days. The condition and quality of each part of the supply chain not only affect the shipping time of the product but also its transport costs. Two aspects of the supply chain that could be particularly important in this respect are Ecuador’s airport infrastructure and the degree of competition in the airline industry.

"Potential to Affect Quality throughout the Supply Chain"

Process Place Time Potential to Affect Quality
Post-Harvest on Farm Ecuador 4–8 hours Medium
Storage on Farm   12–72 hours Low–Medium
Transportation to Cargo Agencies   1–6 hours Medium
Storage at Cargo Agency   4 hours Low
Palletizing Quito 6 hours Medium–High
Customs Clearance Quito 0.5 hours Low
Loading to Aircraft Quito 1–2 hours Medium–High
Flight UIO-MIA   Nonstop 4 hours High
Customs Clearance Miami 4–12 hours Low
Depalletizing Miami 2–4 hours High
Storage at Cargo Agency Miami 4–72 hours Low–Medium
Transportation to U.S. Retailer   2 hours–5 days Medium

     UIO, Quito’s international airport, is located inside the city limits at about 2,814 meters above sea level and is open between 5:45 a.m. and 1:00 a.m. every day. However, during the high season for perishables, it operates 24 hours a day. The airport has a single runway, which is 3,120 meters long. A new Quito airport is scheduled to open in 2009 and is being built in a valley 24 kilometers west of the city at 2,400 meters above sea level.
     There are three major constraints affecting exports of perishables from Ecuador.
          FIRST:  Because of the altitude, only short- to medium-range aircraft can land. For the same reasons, aircraft cannot take off fully loaded.
          SECOND:  There is only a limited size area for refrigerated storage, about 7,000 square meters. During high season, the area fills very rapidly, and it is not uncommon to see boxes of flowers stored on the airport’s tarmac. (NOTE 4).          
 the fee structure at Ecuadorian airports has a major impact on the cost of transporting perishables. As the following Table illustrates, at $2,221, UIO landing and other fees for an aircraft weighing 150 metric tons are the highest in Latin America.
     From the early days of the industry, guaranteeing cargo space on passenger flights has been a major problem. It was not until 1990 that the now defunct state-owned carrier Ecuatoriana de Aviacion began to operate aircraft exclusively for cargo. Today, only a handful of carriers offer routes from Ecuador to the U.S. and Europe. In recent years integrated cargo carriers have become more important in Ecuador. An industry survey of airlines reveals that in 2005, cargo-only carriers such as Lan Cargo, Martin Air, Arrow Air, Cargolux, Tampa Cargo, and UPS together transported almost 79 percent of cargo out of Ecuador. During the peak season, firms also resort to the use of chartered cargo aircraft to overcome the transport capacity constraints.

Estimated Landing and Other Fees at Selected Airports

Country Airport Code Landing Fees ($) Other Fees ($) Total ($)
Ecuador UIO 1,661 560 2,221
Ecuador GYE 952 305 1,257
Colombia BOG 1,075 84 1,159
Costa Rica SJO 60 427 487
Guatemala GUA 40 112 152
Source: International Air Transport Association (IATA), Ecuador

     A frequent claim of Ecuadorian fresh flower producers is that transportation costs are higher in Ecuador than in other countries, which significantly reduces competitiveness. The arguments supporting this contention are often anecdotal based on the “asking price” rate a freight forwarder is most likely to quote. Compared with their Colombian counterparts, producers assert that the freight rate from Ecuador is US$1.60 per kilogram, while in Colombia it is US$0.96. By contrast, IATA statistics indicate a freight rate somewhere in the middle between $1.31 and $1.38 per kilogram. Additional industry estimates suggest that transportation costs of Ecuadorian flower exports account for as much as 25 percent of the wholesale unit price of a stem in the United States and 33 percent in Europe.
     To check the accuracy of these estimates, look at the data from the U.S. government and focus on roses, Ecuador’s main flower export. (NOTE 5).
    The information below presents the results from 2006. To control for seasonal effects, look at freight costs in two months: February, when, due to the “Valentine day effect,” demand is at its highest in the year, and August, when sales are closer to the monthly average. Ecuador’s freight costs, measured on a per value basis, are 50 to 60 percent higher than Colombia’s, a difference which cannot be explained by distance alone. The distance from Quito’s to Miami’s airport (1786 miles) is 17 percent higher than from Bogotá’s to Miami’s airport (1520 miles). Assuming an elasticity of freight to distance of approximately 0.17, this difference would translate into freight costs that are 2.9 percent higher, well below the figures implied by Table 4.4. Ecuador’s freight costs are also 45 percent higher than those of the Netherlands on a per value basis, even though the distance between the Amsterdam Airport and New York’s JFK (the closest distribution center to the Netherlands, 3653 miles) is roughly twice that from Quito’s to Miami’s airport.
    Ecuador’s high transport cost is also suggested by the results of a regression exercise, using data for rose imports to the U.S. from 2000 to 2006. Controlling for differences in weight to values (or unit prices) across importers and for year and monthly effects, Ecuador’s trans port costs are estimated to be 15 percent higher than Colombia’s and 8 percent higher than those of the Netherlands, a result that can hardly be explained on the basis of distance alone.
    Some of the most likely factors behind Ecuador’s high transport costs were already hinted at by the previous analysis of the industry’s logistic chain. That is, limited and costly airport infrastructure—including the lack of refrigeration facilities—limited competition for cargo services, and great variation and uncertainty of shipping times. Other possible sources of higher costs may be related to the smaller scale of Ecuador exports compared to Colombia and the Netherlands, the fee structure at Ecuadorian airports, and the substantial imbalance sustained by Ecuador in its trade with the U.S., also known as the “peak load problem.” When the demand for transportation services is unidirectional, freight rates are simply higher as the shipper pays for forgone capacity on either the inbound or outbound flight. When the trade imbalance is strongly positive (more exports than imports) as is the case of Ecuador, transportation costs for exports tend to be higher than for imports.
    One can hardly overestimate the importance of transport costs for an industry such as cut flowers in Ecuador. A trade policy that focuses only on traditional, policy related trade costs would be missing the bulk of the barriers to trade and would be undercutting the country’s opportunities abroad. That is particularly the case of Ecuador’s exports to the U.S., where a sequence of unilateral preference initiatives have eliminated tariff for Ecuador’s products. It is true that those preferences are temporary. They look particularly fragile amid the current adverse political climate to trade agreements both in the U.S. and in Ecuador. Yet, as important as those preferences are—particularly in the face of strong competition coming from extremely labor-intensive countries such as China—even if they were eliminated in a worst-case scenario, tariffs would remain well below freight expenditures.
    Before the ATPA was granted, tariffs were below 7 percent, whereas estimates put the average ad valorem freight costs at 32 to 33 percent. If the time costs of shipping delays were included, it is more than likely that shipping costs would double, reinforcing their role as the major obstacle to Ecuador’s flower exports. Producers on the ground seem to have identified a sensible policy agenda to reduce these costs. It promotes more investment in airport infrastructure, and of more competition between airports and airlines, particularly through deregulation of the aviation sector.
Gordon Feller
NOTE 1:  Until Ecuatoriana de Aviación, Ecuador’s national carrier, scheduled a weekly flight in 1990, producers had to wait for unoccupied cargo space on passenger planes to transport their products.
NOTE 2:  Expoflores, Ecuador’s Association of Producers and Exporters of Fresh-Cut Flowers, represents about 70 percent of producers.
NOTE 3:  According to Ecuador’s Export and Investment Promotion Corporation statistics, non-oil exports represented $5.18 billion in 2006.
NOTE 4:  A Boeing 757 cargo jet, although suitable for operating out of UIO, is capable of transporting only up to 6,000 boxes when taking off at an altitude of 600 meters or less.
NOTE 5:  U.S. Harmonized System, 0603110060: “roses, fresh, suitable for bouquets or for ornamental purposes, not elsewhere specified or included (NESOI).”

Quote Of The Day

Am I the only guy in this country who's fed up with what's happening?
   Where the hell is our outrage?
   We should be screaming bloody murder!
   We've got a gang of clueless bozos steering our ship of state right over a cliff, we've got corporate gangsters stealing us blind, and we can't even clean up after a hurricane much less build a hybrid car.
   But instead of getting mad, everyone sits around and nods their heads when the politicians say, 'Stay the course..'

Lee Iacocca, the man who saved Chrysler two decades ago, at 82 from his new book “Where Have All The Leaders Gone?”


Air Cargo News FlyingTypers leads the way again as the world’s first air cargo publication to connect the industry to the broadly expanding and interactive base for social commentary—Twitter.
     Here are updates from Twitter so far this week. To be added to this 24/7/365 service at no-charge contact: acntwitter@aircargonews.com

October 6:   UPS says pay a nickel a pkg to offset CO2 in USA and they will match it. So what about the rest of the world? www.ups.com/carbonneutral.

October 6:   Singapore Cargo landed at ATL last month with its B747-400F that serves Europe and Middle East as it roams the world looking for freight.

October 6:   U.S. Department Of Homeland Security distributing about $355 million in stimulus funds for more than a dozen airport security projects including baggage systems, cameras.

October 6:   Air Cargo Association 13th Hawaii Air Cargo Day Tuesday, October 20 Pagoda Hotel $75.00 starts 0700 breakfast-sessions at 0800 includes lunch. More Kathy Lyons, lyonsk001@hawaii.rr.com.

October 6:   JetBlue once a lock to ditch New York HQ for Orlando may be rethinking move in 2012. Current digs at 35 USD Sq Ft but NYC at 25 per sq. ft. (and less) common.


Contact! Talk To Geoffrey

RE: Rise Of Fall In Air Cargo

Dear Geoffrey,

     Just finished reading today's edition of Flying Typers & as I read your introduction pursuant to the entry of traditional holiday peak season for air, I couldn't help but reflect on much of what I heard last week while attending a Maritime Conference in Vancouver.
     I am working on a multimodal project for the gateway council up there & so had cause to go hear how the other modes are getting along.
     As you may recall, I actually entered the logistics world largely through the Port of New Orleans about 20 years ago, so the seaborne world was not at all foreign to me but it was almost poignant to see how many folks I knew were still in it.
     Reporter Janet Plume used to write for a couple of New Orleans-area ocean publications & interviewed me back when I was the 25 year-old managing director of Louisiana Trade Initiatives. My almost 20 year old daughter hadn't been born yet!
     Anyhow, to the subject of the day ... of course given slower going, the holiday peak season for transpacific maritime has only about a week to go and from what I was hearing, 2009 will be remembered as a year without a peak. That's what was repeated from both the ocean carriers and the rail interests who serve them.
     If that's any indication of what we can expect on the air side, it's quite bad news indeed.
     Something else interesting to me was that in Hong Kong a couple of weeks ago when I moderated a session at Air Freight Asia, there was quite a bit of discussion (as there also tends to be within IATA) of tonnage lost to diversions to sea from air.
     It only underscores the orders of magnitude in difference between air & sea by weight that what is considered a body blow to the air cargo industry was not even recognized by the maritime side of the ledger.
     But for my own querying, the subject of what ocean carriers have won from their air competitors did not come up even once ... so small is its contribution to their bottom line. Interesting contrast in perspectives, I suppose.

Best Regards,

Jake Was Jake

     J.H. “Jake” Trainer, 76 of Marietta Georgia died October 5 at home after battling lung cancer and a stroke.
     Jake was a fixture of ATL cargo at Surf Air Forwarders for 22 years retiring in1999.
     “He loved what he did & anything with wheels,” his wife Clemmie said.”