LCC for Freight Carriers

[ProLine4]

My bet is that when it happens, it'll be high-volume, cherry- picked routes, serving a few thousand major customers in a few dozen easily-accessible destinations . . . . in other words, they'll just skim off some of the cream.

Isn't this role currently filled by the likes of existing 121, supplemental 121 or 125 carriers?
The US already has operators that can contract quite easily fill the void in markets where additional lift is needed. Also, those carriers have the ability to offer ACMI "wet" or dry leases to other airlines as needed (Southern & China Cargo, Atlas & China Airlines Cargo, World and everyone under the sun, etc).

The infrastructure costs alone to support an LCC operation IMO are prohibitive. It would have to be incredibly capitalized to start up the operation, and these expenses would certainly have to be passed on to the new customers. About the only way they might be able to do it would be to operate at citypairs where they solely can rely on freight consolidators and forwarders to fill their flights. But again, that's quite a risk as an upstart company to place the ground portion of your operation in the hands of another company.

 

[iaflyer]

i know the majors have scope clauses and i am sure the cargo guys do too....but if they didn't have scope, what would be the impact of FedEx and UPS outsourcing more and more freight to lower "mesa type" bidders?

I think one aspect preventing much outsourcing (beyond scope) is reliability. Sure, the lowest bidder, airline X can fly the route, but can they do it five or six times a week, every week, as well as recover to mechanicals and the like? It's easy for a lower cost carrier to pick one or two flights, but to do it ever day?

Reliability is key in the express business. All it takes is one package that's contains a contract worth $100,000 to go missing - that company might never use you again. Multiple that by all the packages on one broken airplane. Fedex Express moves 3.3 million packages every night, 99.9% reliability just isn't good enough.

To what extent do the polar/atlas kalitta and etc contract freight for FedEx or UPS? or do they?

On the Kalitta side, very little. I believe UPS has a pretty good scope preventing this type of thing. I have no idea what the UPS scope says, but I *think* Kalitta has picked up some UPS logistics work on a temporary basis in the past. The kind of stuff that is too short for UPS to buy airplanes and staff for.

I have seen an Atlas airplane using a Fedex callsign - what it was doing, no idea.

iaflyer

 

[Clyde]

I don't think anyone here is talking about a "new little LCC that is in trouble if their plane breaks", anymore than American was talking about that "little, bitty 737 outfit over at Love field".

I think what is being speculated about here doesn't have anything to do with the USPS, either. My bet is that when it happens, it'll be high-volume, cherry- picked routes, serving a few thousand major customers in a few dozen easily-accessible destinations . . . . in other words, they'll just skim off some of the cream.

I think you are overlooking a major point here: the one thing American and Southwest both have in common is that they offer ONE service: taking a passenger from one airport to another. That's it.

How much infrastructure do you need to start a LCC passenger operation? Not a whole lot. Buy a few airplanes, lease a few gates, and serve a few cities.

Can you honestly see UPS or FedEx leasing out some of it's space at their sort centers for some start-up LCC cargo outfit? Can you see them leasing some of their trucks to move the parcels? Nope.

And that's my whole point. Starting an ANY cargo airline requires much more than just buying the airplanes. The cargo business is an entirely different animal than the passengers.

Also, for an airline to offer the customer the level of service that one would find at UPS or FedEx and then offer it at a much lower price, would be insane. They would be bankrupt in less than a month.

Why do you think there are still so many people out there still trying to start-up all of these LCC pax operators, but you don't see anyone starting from scratch saying "let's take on the UPS's and FedEx's of the world". Because they know they can't.

One final point: UPS has BILLIONS of dollars. They are very diversified. They can do anything they want. If a LCC cargo operator tried to take them on, UPS could lower their prices below that of the LCC competition and keep them there until the smaller one is out of business. The legacy carriers on the pax side of the airport didn't have that luxury. That is the only reason the LCC's have made it this far.

 

[Clyde]

i know the majors have scope clauses and i am sure the cargo guys do too....but if they didn't have scope, what would be the impact of FedEx and UPS outsourcing more and more freight to lower "mesa type" bidders?

to what extent do the polar/atlas kalitta and etc contract freight for FedEx or UPS? or do they?

To answer your outsourcing question, it has to do with control. If a feeder flight full of passengers is late, you've upset probably 50-100 people. Chances are, most of them will choose your product again. Out of say 100 people, you might see half or slightly more than half of them miss a connection. That won't delay the entire operation of the mainline airline.

Go to the cargo side for a minute. When a 757 is fully bulked out, it has close to 80,000 packages on board. You could also think of it as 80,000 customers. If these packages don't arrive on time or within a reasonable amount of time, there are going to be a lot of angry customers. If this plane, or more are late inbound to the sort centers, it could wreak havoc on the entire system. The more you subcontract, the less control you have. The more control you have, the greater the odds your operation will run on time. The package haulers have more to lose than the passenger carriers do if things don't happen when they are supposed to.

With contractors flying that much bulk around the system, anything could happen and you may or may not have a say in it. The only thing guaranteed is that you will have to answer to your customers.

 

[profile]

Both UPS and FedEx do some wet leasing during peak to even out the demand. UPS has, historically, done more than FedEx, in that regard. I assume that DHL is similar, but they do more belly freight for their core movement.

All the companies use belly freight to move that which is unable to move on their airplanes. I assume they all charter aircraft as required, also, to make delivery commitments.

The Atlas charters are for a specific customer out of Asia that needs 747s at certain times of year.

All of them already have their "regional" fleets to get items to the smaller cities.

I don't think that the cost of crews is a big player for the big three. Think about it. The airplane costs are the same, probably less if you operate them yourself. The ground crew costs, they all use part timers, etc, so that's pretty low. The cost of truck/van drivers is all about the same, a market rate, if you will.

What percentage is crew costs here? Is there a possibility of enough savings to make a LCC worthwhile? Where do the savings come from that are enough to justify the start up costs? What is the biz model that saves money?

In terms of farming out the flying, consider: The loss of custodial control costs how much in terms of reliability compared to the crew costs, if flying is farmed out? If you farm it out, the other operator needs to make a profit, so that thins out any advantage in that area, and the rest of the costs are the same either way. Still needs all the ground crews, etc. Now you can't control the operation, the ops specs, who have an intermediary on deciding where the aircraft go (not just a flight dispatcher decides where to divert in this kind of operation, unlike a pax one).

Much more complex system, overall.

 

[wndshr]

freight drivers....how often do you have mechanicals that could disrupt the sked and how do you plan for them? extra a/c on stby? now if you sub out they certainly can't provide extra a/c in case their a/c goes T/U...right?

how are mechanicals looked at by management...better have a really "good" reason to delay/cx or else a carpet dance in the chief pilots office? mx must be awesome because you never hear of mechanical issues with freighters...and fedex has the majority of older planes too!

 

[Ty Webb]

One final point: UPS has BILLIONS of dollars. They are very diversified. They can do anything they want. If a LCC cargo operator tried to take them on, UPS could lower their prices below that of the LCC competition and keep them there until the smaller one is out of business.

You guys are cracking me up. This statement could have been made by a Delta pilot in 1998 . . . . . . Today, AirTran has a higher market cap then Delta.

Anyone that thinks that their industry or carrier is immune to the forces of change is probably going to be the least prepared when it happens.

And if there is a terrorism event on the cargo side . . . . all bets are off.

 

[Big Beer Belly]

freight drivers....how often do you have mechanicals that could disrupt the sked and how do you plan for them? extra a/c on stby? now if you sub out they certainly can't provide extra a/c in case their a/c goes T/U...right?

how are mechanicals looked at by management...better have a really "good" reason to delay/cx or else a carpet dance in the chief pilots office? mx must be awesome because you never hear of mechanical issues with freighters...and fedex has the majority of older planes too!

With 270 (approx) aircraft, it's safe to say UPS deals with mechanicals EVERY night as I'm sure FedEx does. UPS plans for them by having a substantial number of spare aircraft capable of launching every day and pre-positioned in at least a half dozen major gateways spread across the US. Each afternoon, UPS has approximately a dozen aircraft already pre-flighted, empty, sufficiently fueled, and cockpit "sealed", capable of being launched within 30 mins, with crews standing by in facilities just waiting for the call to launch. Years ago we used to launch two empty aircraft, fully fueled, and have them orbit over the Great Lakes and Southeast US and divert them as required to "rescue" volume due to mechanicals or whatever. Why go to such great lengths to "protect" the volume, you say? Well, as another UPS pilot previously explained, between senders and receivers, UPS stands to lose as many as 100,000 customers for each flight that fails to make service. Additionally consider that most all air volume comes with a money-back guarantee if your package is not delivered as promised (exceptions for "acts of God", wx, etc...) and you begin to understand the mindset and competitive pressure UPS is under.

To a pax pilot, this type of backup (wasteful inefficiency?) is unthinkable. In the pax industry, flight cancellations are routine. Simply book the cancelled pax on a later company flight or book them on a competitor ... no big deal. In the express package industry, flight cancellations are nearly unheard of ... and I mean that quite literally. About the only time UPS cancels a flight is if the airport authority has closed an airfield or the weather absolutely prohibits the landing (i.e., a hurricane). There is simply far too much in terms of revenue and customer loyalty at stake to even entertain the notion of a flight cancellation.

Some quick UPS facts to help understand the size of the operation ... UPS is the world's largest transportation company and the world's 11th largest airline. It employs in the neighborhood of 370,000 people and serves over 200 countries and territories. It owns approx 270 large jets and over 100,000 delivery vehicles. With all shares of stock considered, it has an approx $100 billion market capitalization. UPS spends more than $1 billion each and every year on information technology. By any measure this company is large, profitable and a determined competitor in the transportation industry.

Finally, it is my opinion that the mechanics at UPS are some of the finest (if not THE finest) in the industry. In all fairness, aircraft utilization rates at UPS are just a fraction of their pax counterparts and this additional "down time" allows more time to work mechanicals and return the jets to service promptly.

 

[Mr Zog]

Ty,

I don't mean to burst your bubble. I think the jest of the matter is that pax and cargo are different. It would be difficult to be a start-up in todays freight industry. UPS/FedEX/DHL can go to a company and offer a wide range of options (overnight express, 2 or 3 day delivery, ground shipment, custom critical, international, door-to-door, etc). Are the cargo companies invincible? NO.
Is our management aware of the competition? Yes. DHL starts an aggessive campaign in the U.S., rumors of a FedEx domicile in Europe and expanded operations there begin. Coincidence? Maybe.

By the way, my name is not Spanky. Thanks.

 

[klhoard]

. . .<snip>.>

And if there is a terrorism event on the cargo side . . . . all bets are off.

Not sure what you're getting at, but I can pretty much guarantee that those boxes won't be scared to get on a jet.

 

[AV8OR]

Just a quick note....

Regarding the "cherry picking" idea...

You'd have to offer a substantial discount with equal or better reliability to the "choice" customer in that city. Considering that all the major players who currently do this work already bundle services (supply chain management) and offer discounts for large volume contracts I think it might be a tough nut to crack. Furthermore since there are already a whole group of companies (ATI, KH, Ameriflight, etc.) who would love that work, what's holding them back?

Also, all you hav to do is read the last couple of years editions of Air Cargo World to learn that the competition to low cost "air freight" is not from LCC's but from from ground delivery domestically and foreign operators doing international ops on both coasts, ala Cathay etc.

Bottom line LCC already exsists in cargo, but so far hasn't really impacted the legacy jobs. We'll see. But, I'd never say never. Last time I did that, I ended up raising hogs for a couple of years...but that's another story.

 

[Publishers]

AV8oR is correct.

Within the parameters of the East coast, literally all two day guranteed freight can be handled by an 18 wheeler. Aircraft are needed for next day and to cover the entire US but the vast majority of cargo is East of the Mississippi river.

It is also cheap. We are talking $.50 a lb or less. Of course this traffic competes with the LTL trucks at even less.

The fight has always been over the premium traffic. One of the killers when I worked with Flying Tigers was trying to integrate telephone poles with envelopes. Airbourne eliminated this by sticking to things that would fit their modified C container and go into the aircraft through the passenger door. That saved them just over $1.0m an aircraft for door and floor conversions but limited the size of package they could handle.

To be competitive in this business, the capital cost is huge because you have to be able to handle a bunch of cities from the get go. I remember the first night at Fedex when about tow packages came through.

Just think of how many of those brown trucks it takes to be UPS. Relatively speaking, the aircraft are the small part of the equation when in airlines, they are significant.

 

[hawkerjet]

i think it would be a very successful operation.( LCC freight) just think of the basics. 1. a new fleet would be cheaper to operate than the existing companies. 2. pilot pay would be a lot lower than the legacy freighters. i am not a airline executive, but i am sure there are a few guys/gals who could run an operation like this successfully. as far as taking market share away from the big boys, it will be tough, but 20 years ago who thought airbus would be outselling boeing. (and let's not get into a govt. funding debate between the two)

 

[Clyde]

You guys are cracking me up. This statement could have been made by a Delta pilot in 1998 . . . . . . Today, AirTran has a higher market cap then Delta.

Anyone that thinks that their industry or carrier is immune to the forces of change is probably going to be the least prepared when it happens.

And if there is a terrorism event on the cargo side . . . . all bets are off.

No, not really. I should have added some more to my post. The difference between Delta and UPS for example, is that UPS isn't leveraged as much as Delta, or any other major carrier for that matter. Some aircraft here are leased, but UPS is one of the few places that OWNS their assets, including the majority of it's fleet.

In 1998, a Delta pilot could have said his airline has billions of dollars. But, there were still a lot of bills his airline had to pay too. That's the big difference I'm trying to make, and the point you're not seeing. We're not leveraged. Our company doesen't have it's next "paycheck" already spent.

When the recession and 9/11 hit, the revenues came down and the bills stayed the same or went up, those billions of dollars started drying up pretty quick.

Your side of the industry isn't diversified either. What other services can Delta or AirTran offer besides taking passengers from A to B? That is why you can't compare what LCC's such as AirTran have done to the pax side with the prospect of doing the equivalent on the freight side. The flying IS JUST ONE SMALL PART OF A HUGE OPERATION. Just to give you an idea of the magnitude of all of this, UPS could probably purchase AirTran just with the money it has sitting in it's petty cash account. Could Delta do that to AirTran?
Are you seeing my point now?

My industry is not immune to the forces of change or world events. My company is very good at reinventing itself, adapting, and growing to meet the needs of present and future customers. Do you think it's just dumb luck that UPS and FedEx were still making profits right after 9/11?

Ask yourself this: could you start a LCC trucking outfit to compete with UPS? And then ask yourself these two questions: Would I also have to offer they types of logistical and transportation services UPS can provide, and if so, can I do it by charging less AND still be profitable? This get's a lot more complicated than just "cherry-picking" freight here and there.

 

[Clyde]

i think it would be a very successful operation.( LCC freight) just think of the basics. 1. a new fleet would be cheaper to operate than the existing companies. 2. pilot pay would be a lot lower than the legacy freighters. i am not a airline executive, but i am sure there are a few guys/gals who could run an operation like this successfully. as far as taking market share away from the big boys, it will be tough, but 20 years ago who thought airbus would be outselling boeing. (and let's not get into a govt. funding debate between the two)

1: Airbus vs Boeing: manufacturing industry, not service industry.

2: New Fleet: cheaper to operate yes, but very expensive to purchase.

3: Pilot Pay: lower, maybe. Have a plan to deal with a pilot union?

I'll give you those. Now, are you just going to run airplanes all night between a few airports? How are you going to get the packages from individuals to the airplane? If you have a small fleet serving, say, 10 cities, how are you going to deal with customers who want to ship packages to cities you don't fly into? How about a sort facility? That's going to take some capital. Trucks? How about a fleet of newer trucks? Cheaper to operate, but just like the airplanes, more expensive to obtain. Going to need drivers too. Do you have a plan to deal with the Teamsters? Guarantee they are'nt going to drive for "LCC" wages. Mechanics, for the airplanes and trucks. How about all of the paperwork to deal with the DOT for road and air? Better have a good management staff. What if you "cherry-pick" a big account such as Dell and they want to know if you can handle customs, warehousing, and logistics? Think that might be cheap to do as well? How about tracking every package on every flight or truck in the system so your customer knows where it is? Think that might cost a couple of bucks? Oh, and I almost forgot. What about guarantee's on service? Are you going to offer the customer his/her money back if a critical shipment is late? With low-aid pilot's and truckers, you better have this fund very well financed. And speaking of capital, who's going to fund this? Any banks willing to lend out a few billion dollars so one could take on the likes of UPS/FedEx/DHL?

Again, I reiterate an earlier point. Unlike a LCC airline like AirTran, one cannot just pick up a few old DC-9's, add water, and voila!, have an airline. The airplanes and pilots are just a VERY SMALL piece of a MUCH BIGGER puzzle that one would have to assemble.

 

[Clyde]

AV8oR is correct.

Within the parameters of the East coast, literally all two day guranteed freight can be handled by an 18 wheeler. Aircraft are needed for next day and to cover the entire US but the vast majority of cargo is East of the Mississippi river.

It is also cheap. We are talking $.50 a lb or less. Of course this traffic competes with the LTL trucks at even less.

The fight has always been over the premium traffic. One of the killers when I worked with Flying Tigers was trying to integrate telephone poles with envelopes. Airbourne eliminated this by sticking to things that would fit their modified C container and go into the aircraft through the passenger door. That saved them just over $1.0m an aircraft for door and floor conversions but limited the size of package they could handle.

To be competitive in this business, the capital cost is huge because you have to be able to handle a bunch of cities from the get go. I remember the first night at Fedex when about tow packages came through.

Just think of how many of those brown trucks it takes to be UPS. Relatively speaking, the aircraft are the small part of the equation when in airlines, they are significant.

Publishers makes a very good point. And, I want to add one more thing to this thread. If there were going to be a LCC alternative to a company like UPS, it would have been attempted and brought to frutition years ago. And, there wouldn't have been one airplane in the whole operation. It would have been attempted with trucks.

 

[Ty Webb]

How are you going to get the packages from individuals to the airplane? If you have a small fleet serving, say, 10 cities, how are you going to deal with customers who want to ship packages to cities you don't fly into? How about a sort facility? That's going to take some capital. Trucks? How about a fleet of newer trucks?

My point, Clyde, is that when LCC comes to cargo, it won't attempt to duplicate what you are doing. It won't be seeking expensive infrastructure. It will seek contracts with key customers in key market cities and work that way. You won't see "LCC Cargo Company" trucks driving on your street. That is the whole point!

Also, your information about Delta's position versus UPS is just plain incorrect. Prior to 9/10/01, Delta had net worth of $6 billion (22 bil assets, 16 bil in liabilities); UPS has a net worth of $12 bil.

See for yourself:
see http://www.sec.gov/Archives/edgar/data/27904/000095014401501932/0000950144-01-501932.txt for Delta's Balance Sheet in 2001

and

http://finance.yahoo.com/q/bs?s=UPS to see your comapny's most recent balance sheet.

I'm not trying to be an @ss, simply stating that the cargo industry is not immune to new entrants from LCC operators, and if you guys think that it is, you're just kidding yourselves.

Let's revisit this subject in five years, shall we? I have been on this board for 7 or 8 already, hey, what's another 5 years killing time with such pleasant folks?

 

[ProLine4]

Publishers makes a very good point. And, I want to add one more thing to this thread. If there were going to be a LCC alternative to a company like UPS, it would have been attempted and brought to frutition years ago. And, there wouldn't have been one airplane in the whole operation. It would have been attempted with trucks.

And the market already has some operators like this, such as LandAir Trucking.

 

[Laughing_Jakal]

FlameBait by a nervous Pax guy

Guys,

This is obvious flame bait by a guy who doesn't think it is fair that the cargo side is now viewed as a little more stable. I guess since he doesn't sleep nights, he wants to be able to throw a little uneasiness into our "Day sleep".

Either that or it is a clumsy attempt at either UPS oro FDX management to make us all a little more worrried about our cost competitiveness and our tenuous futures.......my 2 year old son wakes from his sleep complaining about the "Ghosties" in his dreams too...

Either way, the only sleep I lose is when I comfort him. I drink Coke, I go to Disneyland, My kids eat at McDonalds, and I ship FDX. If a low cost carrier thinks they can cherry pick....bring'em on....there's a reason I am paid to do what I do....and you get what you pay for in the end.

One more day..........

Jakal

 

[Ty Webb]

there's a reason I am paid to do what I do....and you get what you pay for in the end.


Jakal

What people pay for is safe, reliable, efficient transportation, whether it be people or goods. If you think that you have a lock on that, you are kidding yourself.

Apparently, what your employer is getting is a coke-swilling, mouse-hugging guy who is apparently giving his kids nightmares by feeding them McDonald's.