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  1. The Cargo Industry and its Relationship with Airport Planning Eric HaoDecember 10, 2013Airport Systems Planning

  2. Outline • History of Aviation and Air Cargo • Overview of the Air Cargo and Delivery Services Industry • Growth and Importance of Air Cargo • Characteristics of Air Freight within the Value and Supply Chain • Differences in Product Delivery: Passengers vs. Cargo • Cargo Airports in the United States • Role of Airports and Airlines in Cargo-Based Business Model • Modern Domestic Market: Consolidation towards Hub Airports • Memphis International Airport: A Case Study • Overview, History, and Technical Features • A Night of Operations for FedEx Express • Challenges in Forecasting • Overall Summary: Implications for Airports

  3. History of Air Cargo in the U.S. Industry 1910 – 1973: Freight was only carried by airlines as a secondary source of revenue on their passenger networks. 1940s – 2000 Exponential growth of air freight surged in U.S. until 2001. 1950 2010 1970 1990 1910 1968: Frederick Smith, Yale undergrad, challenges economic inefficiencies of passenger routes for dual use in term paper. 1988: UPS Airlines is formed. 2013: Capacity cuts as U.S. industry matures with two major players. Rapid growth from emerging Asian markets. 1910: First demonstration of air freight—silk is shipped from Dayton to Columbus, OH 1973: Federal Express, first all-cargo airline and delivery service, is formed.

  4. Exponential Growth of Air Cargo in the U.S. • Air cargo is a key indicator of economic vitality and trade. • Since the 1960s (and before), air freight has grown exponentially within the United States until early 2000s. • Why? 9/11. Recession. Fuel. Also…

  5. Growing Emphasis on International Markets • As U.S. markets mature and saturate, more opportunity in emerging international markets. • In 1991, half of freight transported was within U.S. In 2010, only about one third.

  6. Characteristics of Freight Transported by Air • In terms of weight and volume, freight carried by air represent less than 1% of the share by mode. • However, in terms of value, air freight accounts for about 40%!3

  7. Characteristics of Freight Transported by Air • In terms of weight and volume, freight carried by air represent less than 1% of the share by mode. • However, in terms of value, air freight accounts for about 40%!3 • What makes air transportation special? • Time! Key value added by air transport. • Just-in-time delivery – reduce levels of inventory required. • Faster delivery – increases customer willingness to pay. • Economies of network size – more potential markets for retailers. • Efficiency – Links suppliers, manufacturers, retailers, end consumers. • Most common items shipped are electronics and clothing.

  8. Different Products: Passenger vs. Cargo • Focus on load factor for marketing and market share – frequency wins. • Price-sensitive, volatile demand. • Objective: minimize costs of delivering base product. Passenger Cargo • Load factors are around 60%. • Medium to long-term allotment service. • Objective: focus on building relationships for long-term profitability and sustainability. • Demand forecasting • Inventory control • Network-focus • Hub-and-spokes Photo courtesy: Tamas Kolos-Lakatos

  9. Cargo Service Airports in the United States • Different products sold by different companies means different requirements for airports! More in depth later: • Streamlined integration with modal links (local trucking). • Land area for sorting facilities and aircraft loading. • Runway capacity for peak operations, because cargo airlines operate on a single, nightly connecting bank. • FAA defines a cargo service airport as an airport having a total annual landed weight of more than 100M pounds. • In 2012, 111 airports qualified and fit this definition. • Qualifies airports to obtain cargo entitlements as part of the Airport Improvement Project.

  10. Hub Airport is the Central Link in Supply Chain Retailers Consumer Logistics Processing Trucking Hub Airport Trucking Airport Airport Photos courtesy: Tamas Kolos-Lakatos

  11. Large Movement Towards Hub Consolidation Top U.S. Cargo Airports in 2000 and 2011 (Metric Tons)5

  12. Why the Growth in Hubs?

  13. Gateway to International Markets!

  14. Memphis International Airport: Implications for a Major U.S. Hub Airport

  15. History of Memphis International Airport 2007: Passenger traffic peaks as Northwest accounts for about 81% of total enplanements.6 1986: Merger with Northwest Airlines bolstered traffic to Memphis. 1970 1980 1990 2000 2010 1920 1973: Federal Expressbegins operations at Memphis, its world headquarters. 2008 – Current: Delta—Northwest merger causes capacity cuts at Memphis to remove redundancies. As of 2013, passenger enplanements have dropped by 45%.7 1927: Opening of Memphis Municipal Airport 1985: Designation of a hub for Republic Airlines.

  16. Geographic Location of MEM

  17. Layout of Memphis International Airport R1 FedEx Facilities Passenger Facilities R4 R2 R3 1 KM

  18. Relationship with FedEx Express • Flexibility required in establishing a major cargo base. • FedEx facilities occupy (lease) 18% of the total land area at MEM. • Centralized sorting operations, corporate offices. • Fourth largest fleet in the world in terms of fleet size. • Mutually beneficial relationship between company and airport established foundations for the hub: • Over 10,000 people employed in the Memphis area by FedEx Express. • Reasons for selecting MEM as the headquarters: • Good weather, which is crucial for cargo operations. • Central Time Zone – one extra hour with the proximity of east coast. • Geographic location – centered between west, south, and east coast. • Lure of $6M loan by the airport in 1972. • Founder’s hometown.

  19. Operations Montage • In the evening, the first inbound flights arrive at MEM. • In total, 150 aircraft land and depart, peaking at one operation every 30 seconds. Photo courtesy: Tamas Kolos-Lakatos Operations Information from FedEx8

  20. Operations Montage • 7,500 associates unload packages off the aircraft and transport them to the Primary Matrix, FedEx’s main sorting facility.

  21. Operations Montage • Around 2.2 million packages get dumped nightly onto the top rack of the Primary Matrix’s 80 conveyor belts. • 17M shipments on X-MAS. • 42 miles of conveyor belts. • 500K packages/hour.

  22. Operations Montage • The package is scanned by a light curtain, which retrieves information about its origin, destination, weight, and shipper.

  23. Operations Montage • After scanning, the package is collected via robotic controls and sorted at least three times before it clears security and is organized into an outbound container.

  24. Operations Montage • The outbound containers are loaded onto the aircraft, which all leave Memphis by 6:00 AM.

  25. Operations and Implications for Airports • Capacity • Single connecting bank concentrates demand on peak periods. • Recent emphasis on hub-to-hub international flying. • FedEx business model (space reserved for long-term partners) means large portion of flights fly half empty! • Weather • Because of the nature of the delivery industry (time is key!), delays are crippling. • Airline requires privileged access and space to airport terminal and runways. • Noise • Nighttime flying. • 8,750 housing units and seven schools affected. • Noise abatement strategies (preferential VFR corridors, FAA Stage 3)

  26. Challenges in Forecasting and Planning Source: MEM Master Plan9

  27. Challenges in Forecasting and Planning Historical Forecast Source: MEM Master Plan9

  28. Overall Summary • Recent Trends • Maturity of the U.S. cargo market and the rise of globalization. • Result for Airports: Emphasis on serving emerging markets results in need for more hub-to-hub flying. • Fundamentally Different Business Model • Smaller customer base results in relationship-based industry, longer term cargo contracts, and higher quality of service. • Time-based product value perishes with delays. • Result for Airports: Higher degree of collaboration and flexibility required for cargo-based airlines. • No Airlines, No Airport • Delta-Northwest merger resulted in dramatic loss of service to Memphis, destroying expectations for forecast increase. • Result for Airports: Future of Memphis International Airport requires major reconsideration of expansion feasibility.

  29. Bibliography • RITA – BTS. Air Cargo Summary Data. U.S. Department of Transportation. 2013. Report. Available: http://www.transtats.bts.gov/freight.asp • RITA – BTS. Table 1-49: U.S. Ton-Miles of Freight (Millions). U.S. Department of Transportation. 2013. Report. Available: http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_49.html • Chopra and Meindl. Supply Chain Management (5th Edition). Prentice Hall, 2012. Print. • RITA – BTS. Table 1-50: U.S. Ton-Miles of Freight (BTS Special Tabulation) (Millions). U.S. Department of Transportation. 2013. Report. Available: http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_50.html • Airports Council International. Airport Traffic Reports. Airports Council International – North America. Web. Retrieved: November 26, 2013. Available: http://www.aci-na.org/content/airport-traffic-reports. • Jacobs Consultancy. Airport Inventory Master Plan Update: Memphis International Airport. Rep. No. MEM548- 1. Memphis, TN: Memphis-Shelby County Airport Authority, 2010. Print. Available: http://www.mscaa.com/themes/memairport/images/MPAIRINV.pdf. • RITA – BTS. Table 1-44: Passengers Boarded at the Top 50 U.S. Airports. U.S. Department of Transportation. 2013. Report. Available: http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_44.html. • FedEx YouTube Channel. Inside the FedEx Memphis “Super Hub”. Web. Retrieved: November 27, 2013. http://www.youtube.com/watch?v=iYzQ7JSBIGU. • Jacobs Consultancy. Aviation Demand Forecasts: Master Plan Update for Memphis International Airport. Rep. No. MEM548-2. Memphis, TN: Memphis-Shelby County Airport Authority, 2010. Print. http://www.mscaa.com/themes/memairport/images/MPADF.pdf.