LCC for Freight Carriers

[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.

 

[Clyde]

LCC Has Already Come to Cargo

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?

It's already here. In fact, it's been here for a while. The on-demand freighters such as USA Jet, Ameristar, and Cherry Air, just to name a few. They have been doing what you have been typing about for years. They have found a niche in the automotive market and tried to capatilize on it. Basically, doing what UPS/FedEx/DHL have no interest in doing.

To go a step further, look at airlines such as Evergreen, ATI, and Kitty Hawk. They too have tried to "cherry-pick" certain markets.

How about Atlas, Polar, and Gemini?

From what you have been posting, it sounds as if there might be a LCC cargo company who could come in and take a little bit of the market share from the big 3. Again, I know you said these companies won't be seeking expensive infrastructure, but to be successful, they would need it. Otherwise, they are just going to be an ad-hoc outfit, bidding on whatever happens to come down the line.

I would agree that no industry is immune from new entrants. However, to think that a LCC carrier could come into freight and have the same success it has enjoyed on the passenger side is far-stretching at best. Unlike the passenger side, you can't just buy a few cheap airplanes, hire pilot's at low wages, and start service and expect it to grow from there. Low wages help keep the costs down on your side of the fence, but it wouldn't make much of a dent on my side of the fence. It's a free market, and if anyone wants to try to be the "next UPS or FedEx", I guess there is nothing stopping them. How successful they will be is another story.

Now, regarding balance sheets. I took a look at both links, and even though I analyzed both, I share a short summary of what I found.

DAL: as of 03-30-01, total assets were $22.1B. Cash on hand was $1.172B. The sum of DAL's current and non-current liabilities was $15.9B, with Long-term Debt at $5.896B. DAL's current and non-current liabilities on 03-30-01 was equal to 71.9% of their total assets. The amount of cash on hand on 03-30-01 was equal to 5.3% of their total assets. The amount of Long-term Debt at DAL on 03-30-01 was equal to 26.6% of their assets.

UPS: as of 09-30-04, total assets were $30.9B. Cash on hand was $2.8B. The sum of UPS TOTAL liabilities was $15.4B, with $3.1B in Long-term Debt. UPS's total liabilities on 09-30-04 was equal to 49.9% of their assets. The amount of cash on hand on 09-30-04 was equal to 9.1% of their total assets. The amount of Long-term Debt at UPS on 09-30-04 was equal to 10.1% of their total assets.

I referenced the data in the above links posted by Ty Webb to research the balance sheets.

Not really sure what your point was by putting in these links. However, after analyzing the balance sheets, UPS is in much better shape now than DAL was in the pre-9/11 airline economy. If DAL's (and a lot of legacy carriers) financial health were this strong, perhaps there wouldn't be any LCC's around, except for maybe Southwest. I guess to sum up my point, I would say the reason that the legacy carriers lost business to the LCC's was not because companies like AirTran can fly cheap, but rather because of their costs, specifically the amount of debt they carry. The salaries of the employees are a big expense, but that's not why they are in dire financial straits. Tell your boss to borrow 2 or 3 Billion dollars so you can buy more airplanes, gates, and expand. Then, offer to take a 10-15% paycut. Think AirTran would show some record profits then?

 

[Ty Webb]

I think that the premise that started this whole debate was, "Could a Jet Blue-type entrant hit the cargo market like has happened to pax-carrying ops?".

I would say, that, yes, a well-funded, well-managed carrier could do what Kitty Hawk, Evergreen, Polar, etc have not done. Would they displace the diverse companies that are UPS and Fedex? Probably not. Would it affect them, if this were to happen, with multiple LCC entrants? Undoubtedly.

Will that scenario unfold? I don't think anyone really knows for sure. I hope not, because I like to see more high-paying jobs than less . . . . but I think anyone saying that it "can't happen" is "whistling past the graveyard".

Thanks for an interesting and informative string.

 

[Publishers]

Someone mentioned LandAir and their "Forward Air " product. Landair started this as the trucker off the Flying Tigers hub in LCK and handled the two day product.

Back then, Scott Niswonger, the chairman of Landair, and I discussed putting up three hubs like we had in Columbus and running an aircraft in a constant circle moving the inter hub freight while all else went just like we were doing with the two day system. He got tied up with PilotFreight before we ever further investigated it. 60% of the hub traffic was truck freight through the two turns and that represented 5% of the cost of the whole operation.

When I went with Evergreen, we set up the hub at Terre Haute and trust me that was an LCC operation handling their express product and using first class mail as filler. We had guys like Connie Kallitta out there going every night.

 

[JerkyHerky]

What kind of freight operation were the "executives at B6" talking about starting? There's alot of flavors of freight that have been discussed on this thread and they are all distinctly different. The express freight operation has the highest barriers and lowest to entry and lower profit margins, and only a select few companies engage in that business. As for the other freight operations, there are a bazillion companies that engage in that including the freight forwarders as well as the airlines themselves. There's the Kitty Hawks, the Atlas', BAX, ATI, ... ad infinitum (?) all moving freight but all occupying different niches within the vast freight industry. Will B6 engage in home delivery of express freight or some other form of the freight industry? They may not even be considering any of the aspects of the industry that UPS/FedEx, etc compete in. Unless you know exactly what type of fruit B6 is considering its like comparing apples and oranges.

 

[LEROY]

I think Ty et al are correct; there could be a LCC freight carrier in this industry. As a matter of fact, I believe there already is. It's called the U.S. Postal Service. Domestically, they offer substantially cheaper overnight rates than either FedEx or UPS. No doubt they have the infrastructure to handle the door-to-door aspect of cargo ops. They even dabble in international operations.

BTW, they outsource their operation too. In fact, they outsource so much, that if FedEx mgmt agreed to it, ALL the domestic USPS express mail would be handled by FedEx (or by someone else who put up a reasonable bid after 2008). USPS is already asking more from FedEx than they are willing to handle.

In my humble opinion, this cargo gig is not about airplanes, gates, hubs, or pilot wages. It's about getting the box from 'A' to 'B'. And if the USPS (niether rain nor sleet nor even snow) has to outsource to a private company for its hi-pri ops, the idea of a "LCC cargo operation" moving in just doesn't seem logical.

What DOES seem logical is someone out-bidding FDX for the USPS express market. But unless they have even greater infrastucture in place than either FDX (or Brown) OR USPS, it won't happen. Period.

Today with most freight company networks it is almost as easy to ship 2-day from anywhere to anywhere domestically via truck as it is via air. 18-wheelers burn a lot less than converted 72's. The domestic market is shrinking. Not an easy market to crack. Internationally, someone said it earlier, you can't just wish your way into new gates in Taipei or Orly. You've gotta have some influence.

So as far as LCC cargo goes, I think it's the opposite of the pax market; it's more expensive to ship on an upstart carrier. But as always, I could be wrong...