The air cargo industry has never been for the faint of heart. By its very nature, it's a solution in times of crisis-getting a replacement part somewhere quickly so an assembly line doesn't shut down or making sure the free baseball hats arrive in time for the season's opener.

Last year's peaking shipping season along the West Coast ports, which was marked by severe congestion and delays, spawned another 'air cargo to the rescue' scenario. While this year appears to be less problematic, there is still plenty going on in the industry. And, while no story seems to be complete without the mention of China, air cargo industry executives say there are significant developments occurring elsewhere in the world that will be just as big news, if not bigger.

The China factor

One of the most pressing concerns that continue to impact rates and capacity is the trade imbalance that's been created by China. Eastbound growth averaged 5.6 percent per annum during the last 5 years and shot up to 17.4 percent last year. The imbalance in the Asia-U.S. trade lane is "huge and getting larger," says Chris Coppersmith, president and CEO of Target Logistic Services. "Rates to Asia are less than one-sixth of those coming into the country." It has created a "terrific hardship on freighter profitability and makes pricing inbound that much more important for airplane operators moving cargo in from Asia. China and freight originating in China moving via Hong Kong and Macao are driving the space markets today."

The Asia-Europe trade lane is experiencing a similar imbalance, explains Julian Keeling, president and CEO of Consolidators International Inc. However, Keeling thinks that the infatuation with China may start to wane. "In spite of the experts that claim China's exports to the U.S. will continue to grow exponentially, I believe it's reached its zenith." There is a "growing resentment toward China's behavior as a global opponent to America's foreign policies," he says, citing North Korea and Iran. In addition, there are hard feelings over China's abuse of intellectual property protections and their insistence to keep the yuan pegged to the U.S. dollar. The surge of garment exports to the U.S. since the removal of global textile quotas at the beginning of the year is yet another sore spot.

"One-way trade is the biggest challenge," emphasizes Keeling. "China imports next to nothing and always will. The same is the case for all their neighbors. I believe industry has to return its roots and forget chasing cheap labor."

In search of the next 'sleeping giant'

According to Susannah "Sue" Sloan Beattie, vice president of Target Logistic Services, Eastern Europe is going to play host to the next big manufacturing boom. She says that beneath the somewhat rusty exterior, the region has a solid infrastructure and other fundamentals that can more than amply support robust manufacturing activity, and do it cost effectively. In fact, Slovakia represents one of the largest auto manufacturing centers.

Keeling agrees. "I have more faith in the former Warsaw Pact countries like Poland, Hungary, Slovakia, and the others when it comes to becoming good members of the world community than I do for all the Asian countries that are currently enjoying new found status. Any company entering into deals with China, which involves the local market, does so at his own peril. There are trails of disasters. I can't wait for the day to see my business expand with the new members of the European Union. That's where I see outstanding opportunities."

John Hill, vice president of sales for Pilot Air Freight, points out that other Asian countries, particularly Vietnam and Pakistan, are also getting more notice nowadays. Pilot Air Freight, like other mid-size forwarders, has been doing exceptionally well on the international front, says Hill. As it turns out, that portion of the business has become so good, that "we've started to approach our domestic customers to try and get their international business too."

Customers find they get what they pay for-literally

Just as cheap labor alone should not be the primary consideration when looking globally for sourcing and manufacturing opportunities, when it comes to choosing an air cargo partner, cheap prices tend to equate to sub par service. "The air cargo customer that looks at rates alone is frequently in trouble," cautions Coppersmith. "Trouble with reliability brews problems with customers, which in turn creates internal problems within the customer's sales and marketing department, and eventually loses sales. Customers need to look for service providers that understand their business, design solutions pro-actively for potential supply chain or delivery problems, commit to electronic and other communication elements needed by the customer, and frequently meet and exceed expectations of service."

Keeling sums it up by saying, "Quite frankly, the customer today is getting a Rolls Royce at the price of a Mini." The irony, he adds, is that "the serious forwarder has added all sorts of costly bells and whistles to his communication operations, only to see his customer still call on the phone for an update." Yet many shippers seem to be locked into the 'lowest price' mindset. "Saving a nickel a kilo can make the difference in delivery on-time, or the forwarder's customer having an upset customer himself. We all have to move away from constantly thinking the lowest common denominator."

While there certainly are customers who understand that you tend to get what you pay for, customers have begun to ask more from their air cargo service providers. "The Fortune 500 companies, in particular, are the ones demanding value-added services such as reverse logistics, residential deliveries, and customized warehousing solutions," says Hill. "Rather than forcing the customer fit into our system, we try and build customized programs for them."

Not only are companies offering more customized services, they're servicing a diverse client base. Target Logistic Services has an impressive customer base representing various product and industry sectors. The company even has a specialty service that handles residential deliveries for a major U.S. retailer's catalog business.

Pilot Air Freight also touts its diversity. "Our customers include e-tailers, consumer product companies, telecommunications companies-the only industry we don't go after is automotive," explains Hill.

An industry in a state of flux

Consolidation is continuing within the air cargo industry, similar to every other transportation sector. What's the impact? According to Coppersmith, "Generally, consolidation always favors the large and discriminates against those companies-forwarders and shippers alike-that have less freight 'clout.' Consolidation has been beneficial for the ocean shipping industry and makes the vessels more productive on a cross-marketing basis. But for air, the jury is still out. Consolidation, strategic partnerships, alliances, et cetera, are all a part of the better utilization of space, and in some cases can make the risk for the marketing of available space easier for carriers."

Keeling views consolidation less favorably. "Cargo alliances, unlike passenger, have provided little benefit to either airlines or shippers. Cargo cultures remain most diverse among the carriers. I think alliances in air cargo are all about sizzle and very little substance. Most cargo bookings are made via the old-fashioned telephone with a local booking clerk who is known to the forwarder Alliances are trying to rely upon web bookings or a faceless '800' number. It just does not work that way."

On the security front, the Transportation Security Administration has been working with the air cargo industry to develop a freight assessment system for air cargo screening. Industry executives, though, have mixed feelings about the endeavor. Many feel that the current known shipper program is sufficient.

Cathy Langham, president and co-owner of Langham Transport Services, said in a previous interview that the known shipper program helps service providers "profile shipments that probably deserve further scrutiny. If there's any question, if this is an 'unknown shipper' to us or to an indirect air carrier, it would have to move another way. It could not move on a commercial (passenger) aircraft. It could move on a cargo aircraft or it could move on the ground."

The known shipper program relies on a comprehensive database to help keep track of shippers. "It's a confidential program to our industry," explained Langham, "but the shipper cannot enter any data into it." Only the air carriers or forwarders themselves can enter data into the system, and it's been working well from Langham's point of view. "We have lots of information that we have to determine (the risk factor) about our customers. That is the screening process that we use, making sure their shipments are usual and routine, as opposed to something unusual."

Coppersmith says, "The Air Forwarders Association has been working hand-in-hand with the TSA to formulate a good, reliable, and relatively foolproof air freight assessment program than can be implemented on a domestic and international basis. The discussions are ongoing, however the progress has been excellent. We expect that the TSA will have the outline ready for approval within the next six months."

Whatever the new air cargo screening program is, it had better pass muster with the Government Accountability Office. In late May, the GAO released a report that was highly critical of the effectiveness of both the Customs-Trade Partnership Against Terrorism (C-TPAT) and the Container Security Initiative-two programs designed to screen ocean freight bound for the United States.

Rep. Chris Cox, who sits on the House Homeland Security Committee and whose staff took part in the investigation, says he was most worried by two incidents this year that involved Chinese immigrants who had stowed away in containers shipped by C-TPAT certified members. U.S. Customs official claimed the containers were flagged for inspection before arrival, but Rep. Cox replied that the idea was to stop a ship before it reaches America's doorstep.

Langham recalled a similar security breach two years ago when stowaway Charles McKinley shipped himself by air from New York to Dallas. "To some extent, the known shipper program worked because he had to move on a cargo airline to get there. Not that there was a disaster or anything involved in that, but it was an example of the program working. There has never been an airline incident that has happened because of cargo in the belly of the plane. It's never happened. Cargo from a forwarder in the belly of an aircraft has never caused an explosion or an accident."

When asked whether the federal government was dragging its feet on making improvements to air cargo security, Langham said she didn't think so. "I think that the creation of the Homeland Security Department and the TSA has really been done at lightning speed, from a government perspective. I think they've done a good job of putting it together. I think some things have changed and they're working very hard, bringing all the industry people together to improve security processes. I see them doing a lot of work around it. I think they're very diligently moving forward on this."

Langham also believes that "one interesting outcome to this is that there are opportunities to create new solutions, new technologies involved (in) security that weren't there before. It's allowed us to think differently." RFID is an example of a technology that Langham expects will end up playing a significant role in air cargo security.

A strong case for Just-in-Case

Coppersmith has some advice from shippers who have modeled their supply chains on the just-in-time strategy-consider swapping it for a new one called just-in-case. He points out that, "The three assumptions upon which JIT are based: a seamless transportation, generally falling prices of many ingredients making up the manufacturing process, and easy availability of these ingredients from multiple sources, has become severely impacted. New investments in ships, rail cars, and long-haul trucks have been minimal since the late 1980s. It is now obvious that the international transportation infrastructure has not kept pace with the enormous growth in global trade during the past decade. Just ask consignees waiting for their shipments from West Coast ports." These backups are impacting the entire global supply chain, he says. "The JIT method, which depends on moving products quickly and as an on-needed basis simply cannot operate with ships waiting days and even weeks to be unloaded and air freight sitting on the tarmac of Asian airports waiting to be placed on board aircraft already bursting at the seams."

"Tight supply lines and JIT inventory work just fine in a static world with modest competition for materials. This is not the competitive global landscape today. As the world changes from an almost over abundance of raw materials to some degree of scarcity, so will the methods by which firms manage their commodity costs. One of the most effective methods now being adapted by a growing number of companies engaged in international trade is just-in-case (JIC). JIC is a balanced reaction to last minute delivery of parts on one hand and bloated inventory levels on the other. It provides a company receiving the goods, or consignee, necessary 'breathing room.' With adequate inventory on hand, the consignee is assured that his production line will not grind to a halt despite any emergencies like 9/11, which shut down world wide assembly lines for almost a week and cost billions of dollars in lost production time.

Adopting a JIC strategy has advantages for the both the shipper and the air cargo service provider, Coppersmith asserts. "It allows a forwarder like Target Logistic Services to have more flexibility in our pickup and delivery schedules because additional inventory is held by the consignee for those just-in-case situations. We can optimize our door-to-door pickup and delivery schedules to save fuel and make more efficient use of our drivers." Furthermore, "It allows supply chains to function smoothly and without interruption. JIC eliminates almost entirely the most acute nightmare of any corporate executive-a silent production line or a snapped distribution system. JIC also provides a genuine rather than bogus partnership between customer and forwarder, in that responsibilities are balanced equally. Simply put, JIC offers a practical balance between the theoretical efficiencies of JIT and the realities of today's world of logistics."

A strong case for Just-in-Case

Coppersmith has some advice from shippers who have modeled their supply chains on the just-in-time strategy-consider swapping it for a new one called just-in-case. He points out that, "The three assumptions upon which JIT are based: a seamless transportation, generally falling prices of many ingredients making up the manufacturing process, and easy availability of these ingredients from multiple sources, has become severely impacted. New investments in ships, rail cars, and long-haul trucks have been minimal since the late 1980s. It is now obvious that the international transportation infrastructure has not kept pace with the enormous growth in global trade during the past decade. Just ask consignees waiting for their shipments from West Coast ports." These backups are impacting the entire global supply chain, he says. "The JIT method, which depends on moving products quickly and as an on-needed basis simply cannot operate with ships waiting days and even weeks to be unloaded and air freight sitting on the tarmac of Asian airports waiting to be placed on board aircraft already bursting at the seams."

"Tight supply lines and JIT inventory work just fine in a static world with modest competition for materials. This is not the competitive global landscape today. As the world changes from an almost over abundance of raw materials to some degree of scarcity, so will the methods by which firms manage their commodity costs. One of the most effective methods now being adapted by a growing number of companies engaged in international trade is just-in-case (JIC). JIC is a balanced reaction to last minute delivery of parts on one hand and bloated inventory levels on the other. It provides a company receiving the goods, or consignee, necessary 'breathing room.' With adequate inventory on hand, the consignee is assured that his production line will not grind to a halt despite any emergencies like 9/11, which shut down world wide assembly lines for almost a week and cost billions of dollars in lost production time.

Adopting a JIC strategy has advantages for the both the shipper and the air cargo service provider, Coppersmith asserts. "It allows a forwarder like Target Logistic Services to have more flexibility in our pickup and delivery schedules because additional inventory is held by the consignee for those just-in-case situations. We can optimize our door-to-door pickup and delivery schedules to save fuel and make more efficient use of our drivers." Furthermore, "It allows supply chains to function smoothly and without interruption. JIC eliminates almost entirely the most acute nightmare of any corporate executive-a silent production line or a snapped distribution system. JIC also provides a genuine rather than bogus partnership between customer and forwarder, in that responsibilities are balanced equally. Simply put, JIC offers a practical balance between the theoretical efficiencies of JIT and the realities of today's world of logistics."