LCC for Freight Carriers

[wndshr]

i was flying to FLL yesterday and was eavesdropping on an interesting conversation. the pax i was sitting next to was talking to a proclaimed management type from B6....

the B6 management guy was (as anyone could imagine) very excited about the introduction of the rj. the interesting part started when the b6 guy started talking about the introduction of a LCC into the freight market! he didn't say it was going to be B6 or not B6...just a LCC entrant into the freight market. he said it has been tried before but never done right....however, according to him, there is a huge market for a highly capitalized business venture that would take the inefficiencies of the current freight market and introduce a brand that could potentially compete with the likes of UPS and FedEx.

i was thinking....yeah...riiiiiiiiiiigggggggghhhhhhtttttt. but then again, isn't that what b6 has done to legacies so far?

i know nothing about the freight market, so freight types please explain how this would never work!

sidenote: wasn't fred reid laughed out of grad school about his idea?

 

[fr8doggie]

Who's "Fred Reid"?

 

[FlyBoeingJets]

Excellent question. Anyone considering FedEx or UPS as a career, or career change, should consider it.

I personally think it will be hard to fight the barriers to entry in cargo. FedEx,UPS, and Astar/DHL have big bucks tied up in distribution centers and plan to spend even more in the years ahead. They have established customers and retail stores. FedEx just announced they will spend $1.8 Bill on 4 new distribution centers. The one in ATL will be 3 times as big.

I'm open to new thinking on the subject, but who is going to risk the huge capital outlays to fight these guys?

What I am concerned about is contract carrier flights (wet lease?) for FedEx and UPS. I wonder if it will affect hiring/advancement.

 

[katanabob]

The problem with the idea of an LCC in the cargo business (at least, the market share of UPS and FedEx) has to do with the principle of 'barriers to entry'.

In the passenger industry, you can quite literally take one airplane and two cities.. and voila- You have an airline. You can sell tickets between those two cities and as long as there are enough people willing to travel between them and you are priced competitively, you have a market. Barrier to entry is low.

In the package-delivery world, though, you can't just serve two markets. Imagine the problem if you had to turn away every customer who didn't want to ship a package from, say, Dallas to Long Island. You have to be able to serve a significant portion of the market to attract business. Basically, you have to serve everywhere or nowhere. Barrier to entry is high.

There is an inherent inefficiency when you try to serve everywhere. The LCCs have been able to pick markets and thus be vastly profitable. (Until this quarter, actually) The 'Legacy' carriers have tried to serve every market (hence the RJs, etc.) and have realized the diminishing return of trying to do so. (The incremental gain in profit from flying airplanes around that are near their break-even point versus the gain in ability to provide more service. Revenue increases but profit does not. Margins go down.)

As a side note, I think you meant Fred Smith. (Founder and CEO of FedEx) He didn't get laughed out, but he did get a 'C' (if I recall the story correctly) on a paper written at Yale describing what would become FedEx.

 

[Clyde]

LCC Freight

I think it's entirely possible, but not highly probable. As someone mentioned before, who is willing to risk that much capital to enter a market dominated by UPS, FedEx, and DHL?

For starters, one would have to invest in airplanes, and ones that are going to have a high rate of reliability. Next, they would need an infrastructure. i.e., places to sort the freight/packages, distribution, and forwarding just for starters. How is the package going to reach the customer? Going to have to also start some type of ground-based network. i.e., a trucking side. The customer is going to want the ability to track his/her package (probably online) and that technology isn't cheap.

Will a LCC-freight outfit be able to provide more than just package delivery? Something UPS (I don't know enough to be able to speak on behalf of FedEx) can do for it's customers is to provide a level of service above and beyong delivering the package. Warehousing, distribution, supply-chain management, etc.

On top of all of this, UPS and FedEx have HUGE customer bases, similar to what Coke and Pepsi have. Think it would be easy to lure the customer away from them? Again, possible, but not highly probable.

One also has to ask what particular type of market a LCC-freight carrier would aim for. Do they want to haul large bulky freight such as generators across the ocean to Asia, or do they want to haul small packages. The profit margins are a lot higher on small parcels (more money in it), but one couldn't come in and start a LCC-cargo airline as quickly as one could an LCC-pax operation.

True, the LCC's have swayed long-time customers away from the legacy carriers in recent years. However, look at the circumstances. Someone could pay $1200 to go from A to B on a legacy carrier, or pay $400 on an LCC. In the package business, you might pay anywhere from $40 to $200 to ship a package overnight. In some cases, less than $20 to ship a letter. I doubt anybody is going to come into this market and guarantee next-day service or even second-day service at prices 30%-40% cheaper and still be able to provide a comparable level of service.

And, speaking of service, the LCC's have entered the industry with less expensive fares over the years because of things such as one-class seating (I know, not on all) no fancy meals, and more point-to-point service.

A package customer doesen't care if the letter/parcel is shipped non-stop or if it changes airplanes. All they care about is that it reaches it's destination in a timely manner. The difference in price that a hypothetical LCC cargo outfit could produce probably wouldn't be that much to warrant a lot of people's heads to turn. Ever try some no-named brand soda over Coke or Pepsi because it was $0.25 cheaper? Was it worth it? Most people realize you get what you pay for.

All in all, while this type of outfit MAY succeed in the heavy-lift market, I highly doubt it would succeed in the small package market. Unless financed out of pocket, one would have to leverage very highly and the probability of success is low enough that it would probably bankrupt them their first year. Yes, people lauged at Fred Smith, and yes FedEx did it. But, that was 1970 and there weren't too many of these outfits around back then.

 

[Ty Webb]

Well, I think you guys are overlooking the obvious. A freight LCC wouldn't look to emulate UPS and Fedex's system, it would simply cherry-pick certain routes and target certain customers . . . for example, start serving YIP and cities served by automotive manufacturers, or San Jose and Taiwan.

That's one of the reasons LCC's have lower cost- they don't have the massive infrastructure. If it costs $7800. to fly a 717 from ROC to ATL and it carries 20,000# of cargo, it could do it for well under a dollar a pound, with contracts with a few big companies. Contract between a few pharmaceutical companies, sub out the trucking back and forth . . . . and you get the idea.

 

[Publishers]

Even more difficult than the flying part of the equation is the ground delivery operation. Pick up is easier because for the most part you can schedule a route that hits shippers more easily than the delivery process which can go anywhere.

 

[Mr Zog]

Ty,

So you think you can start a LCC freight carrier and just fly to Taiwan and say "Here I am"? Slots into and out of China, Taiwan, Tokyo, Hong Kong, etc are extremely competitive. I don't think the DOT is going to give those slots to an outfit with a small number of planes. I mean American Airlines has been trying to get slots into Shanghai for the past couple of years. Can you start a freight service from LAX to JFK? Sure, who knows maybe you could find a niche in the US. But to just start in the highly profitable international market, I think the barriers are a bit larger.

 

[pilotyip]

LLC cargo already in operation

It is called the on-demand business and no one can do it lower than those guys between two pionts. Zantop tried to do it with outsided carg at the YIP hub for years. They had all the major cities 500K+ connected via air and truck. Did not do them much good, and there was no airplane cheaper to operate than the L-188 for 35K of lift. LLC package is already defined by ABX, there package shipment cost is well below the other two, and they are not exactly booming. So I am not sure what LLC cargo would look like.

 

[Clyde]

It is called the on-demand business and no one can do it lower than those guys between two pionts. Zantop tried to do it with outsided carg at the YIP hub for years. They had all the major cities 500K+ connected via air and truck. Did not do them much good, and there was no airplane cheaper to operate than the L-188 for 35K of lift. LLC package is already defined by ABX, there package shipment cost is well below the other two, and they are not exactly booming. So I am not sure what LLC cargo would look like.

Aren't the profit margins and stability much lower for the type of business Zantop was in than for the type of business ABX is in?