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58 The Product Supply Chain 10-member bi-partisan body of former elected officials and appointees was charged with preparing a "full and complete If policies regarding truck activity in urban areas increase account of the circumstances surrounding the September 11, the cost of freight transportation or add to the time needed to 2001 attacks," including preparedness for, and the immediate deliver freight, the policies will affect a wide range of business response to, the attacks. Between November 2002 and the date decisions and will affect participants all along supply chains. the report was published in July 2004, the commission inter- For example, transport delays tie up inventory in transit, viewed more than 1,200 people in 10 countries. The report which may require shippers to hold higher inventories.99 In itself, which numbers more than 560 pages, contains 41 sepa- addition, transportation costs also can limit the geographic rate recommendations. Most of the recommendations are size of the markets in which firms operate. As the costs of strategic in nature. Only one sentence of one recommendation transportation to a given area increase, fewer producers will specifically calls for air cargo screening: ship products to that market, which will, in turn, narrow the selection of available goods and decrease competition.100 Recommendation: The TSA and the Congress must give prior- The impact of truck access and parking policies is likely to be ity attention to improving the ability of screening checkpoints to small relative to the impacts of traffic congestion. Winston and detect explosives on passengers. As a start, each individual selected Langer estimated that the cost of congestion (both recurring for special screening should be screened for explosives. Further, and incident related) to the highway freight sector in 1997 was the TSA should conduct a human factors study, a method often used in the private sector, to understand problems in screener per- about $10 billion (in 2000 dollars), with a cost to motor carri- formance and set attainable objectives for individual screeners and ers of about $2.5 billion and to shippers of about $7.6 billion.101 for the checkpoints where screening takes place. Concerns also remain regarding the screening and transport of checked bags and cargo. More attention and resources should be Case Study 3: Air Cargo directed to reducing or mitigating the threat posed by explosives Screening Requirements in vessels' cargo holds. The TSA should expedite the installation of advanced (in-line) baggage-screening equipment. Setting Because the aviation industry will derive substantial benefits from this deployment, it should pay a fair share of the costs. The The events of 9/11 illustrated the vulnerability of the U.S. TSA should require that every passenger aircraft carrying cargo commercial passenger air transportation network to attack. must deploy at least one hardened container to carry any suspect Though the specific threat vector employed on 9/11 was a cargo. TSA also needs to intensify its efforts to identify, track, and human one, the actions of 9/11 raised serious concerns that appropriately screen potentially dangerous cargo in both the aviation cargo (both passenger luggage and commercial freight) repre- and maritime sectors.102 (emphasis added) sents a threat to passenger air travel as well. Less than 2 months after the 9/11 terrorist attacks, the Aviation and Transportation This recommendation directly led to the air cargo screening Security Act was passed, which created the Transportation requirement now being implemented. Security Administration (TSA). The 2001 law creating TSA gave the agency duties that Stakeholders include the following: There are, effectively, two sides to this issue. Although there (1) be responsible for day-to-day Federal security screening is agreement among all involved that screening is necessary operations for passenger air transportation and intrastate air to ensure the safety of air travel, significant differences exist transportation; (2) develop standards for the hiring and retention regarding how best to achieve that end. On one side there is of security screening personnel; (3) train and test security screen- ing personnel; and (4) be responsible for hiring and training per- TSA, responsible for defining acceptable measures for mitigat- sonnel to provide security screening at all airports in the United ing the risk of terrorist exploitation of the transportation sys- States where screening is required. tem as a whole, and the air transportation system specifically. On the other side is a portion of the air cargo transportation After a period dominated by politically charged debate over community, which consists of commercial passenger air- what should be done to better safeguard U.S. air travel, Presi- lines, freight forwarders, cargo handling facilities, and ship- dent Bush established the National Commission on Terrorist pers. These stakeholders are represented not only by individual Attacks on the United States. Formed in November 2002 and businesses, but also by a substantial collection of advocacy more commonly referred to as the 9/11 Commission, this groups and associations. Although these interests are not monolithic in nature, the research team's efforts indicate sub- stantial agreement among the various parties regarding the 99Clifford Winston and Chad Shirley, "The Impact of Congestion on Shippers' Inventory Costs," prepared for FHWA, February 2004, p.1. 100GAO, Freight Transportation: National Policy and Strategies Can Help Improve 102"9/11 Commission Report: Final Report of the National Commission on Ter- Freight Mobility, GAO-08-287, January 2008, p. 21. 101Winston and Shirley, pp. 78. rorist Attacks Upon the United States," p. 393.

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59 implementation of cargo screening requirements and their Faced with this mandate, TSA officials concluded that it desire to mitigate its effects on the community. would be impractical to screen the approximately 12 mil- The level of cooperation between TSA and the air cargo com- lion pounds of cargo transported daily on passenger aircraft munity has been significant, but cooperation appears to be less at the time the cargo is enplaned. In fact, TSA concluded so between the air cargo community and the U.S. Congress. that doing so would result in airport congestion that would Industry testimony and public comments argue that the screen- pose a security vulnerability and a threat target of its own. ing rule represents an unfunded mandate that places undue Furthermore, the current state of screening technology burden on businesses and not enough on the government. This does not allow adequate screening of cargo that has already point is made clear in several instances cited later in this case been built into large pallets or unit load devices (ULDs). Air study. Hence, although the industry generally expresses support freight is commonly delivered to airports in this form.105 for the policy, it is at odds with legislators regarding the fair dis- Faced with these challenges, TSA has adopted an alternate tribution of the burden of compliance and has submitted testi- approach of allowing air cargo carried on wide-body planes mony on several occasions that argue that point. (e.g., Boeing 747, 757, and 767) to be screened earlier in the supply chain as long as a secure chain of custody is maintained Policy Actions until the cargo is transported. The main component of this approach is the Certified Cargo Screening Program (CCSP), a Little more than a year after the release of the 9/11 Commis- voluntary program under which TSA-approved forwarders sion Report, Congress enacted the Implementing Recommen- and shippers may screen cargo at the piece level before putting dations of the 9/11 Commission Act of 2007. The bill easily it in pallets/skids or ULDs and prior to tendering it to passen- passed votes in both houses of Congress and was signed into law by President Bush in August 2007. Although the 9/11 Commis- ger carriers. The airlines do not have to re-screen such cargo. sion's report said simply that TSA needed "to intensify its efforts Cargo carried on narrow-body planes (e.g., Boeing 737) must to identify, track, and appropriately screen potentially danger- be screened by the airlines themselves. Narrow-body planes ous cargo," the new law laid out specific and aggressive require- carry primarily small express shipments and do not carry cargo ments for TSA. The law requires TSA to implement a system to pallets/skids or ULDs. screen 50 percent of all cargo carried on passenger aircraft by The screening requirements specified in the law were met February 2009 and 100 percent of such cargo by August 2010. with a significant degree of concern by members of the air The law specifies that TSA freight transportation community. In testimony offered to the Transportation Security and Infrastructure Protection Sub- . . . shall require, at a minimum, that equipment, technology, committee of the House Committee on Homeland Security procedures, personnel, or other methods approved by the Admin- in March of 2009,106 Air Transport Association of America istrator of the Transportation Security Administration, are used to screen cargo carried on passenger aircraft to provide a level of President James May expressed significant concern about the security commensurate with the level of security for the screening ability of the community to meet mandated screening levels. of passenger checked baggage. Mr. May stated that The law goes on to state that The biggest challenge in meeting the August 2010 deadline is the lack of TSA-certified screening technology to inspect large air . . . acceptable methods of screening include x-ray systems, cargo pallets. Most pieces of cargo transported on wide-body air- explosives detection systems, explosives trace detection, explosives craft are consolidated into large shipments and 75 percent of detection canine teams certified by the TSA, or a physical search cargo is transported on wide-body aircraft.107 That fact gives you together with manifest verification.103 an idea of the magnitude of the challenge that we face. The law allows the TSA to Mr. May went on to describe the challenge in further detail, stating . . . approve additional methods to ensure that the cargo does not pose a threat to transportation security, Shippers and freight forwarders typically create these pallet-size shipments before they are tendered to an airline. The dilemma is but specifically excludes . . . solely performing a review of information about the con- tents of cargo or verifying the identity of a shipper of the cargo 105John Sammon, Assistant Administrator, DHS, written testimony for the Sub- that is not performed in conjunction with other security meth- ods, including whether a known shipper is registered in the committee on Transportation Security and Infrastructure Protection, House known shipper database.104 Committee on Homeland Security, July 15, 2008. 106Available at: on+Air+Cargo+Screening.htm 103 107TSA estimates run as high as 80 percent, though narrow-body flights account Public Law 110-53, August 3, 2007, Sec. 1602, (a) (2). 104 Ibid, Sec. 1602, (a) (5). for 90 percent of all cargo-carrying flights and 85 percent of all passenger travel.

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60 that screening is required at the piece level but existing technology recovery will lead to an increase in cargo volume, making cannot screen large consolidated shipments. The nature of our compliance with the 100-percent requirement even more business and available screening equipment are, at least for the difficult. time being, badly mismatched. Airlines still lack space/facilities to de-palletize, screen, and re-configure large shipments. He further explained that Screening difficult, complex, skidded cargo for wide- Breaking down consolidated shipments at an airport cargo body planes has not been addressed. Most shipments facility is not practical. Shipment size, time constraints and facil- screened today are not skidded and move on narrow- ity limitations are the main difficulties. A pallet can have as many body aircraft. as 200 pieces on it. Dismantling it and screening each piece is labor Some commodities were screened by an alternate means for intensive and time consuming. To place this in some perspective, it can take 75 minutes for two employees to break down and a limited time (until August 31, 2009). Those alternatives reassemble a pallet. In addition, airport cargo facilities were never are no longer available. designed to be high-volume disassembly and reassembly loca- About 85 percent of current screening entities (airlines and tions. They are not big enough to perform that role, especially at CCSP freight forwarders) use explosives trace detection peak times. (ETD) as their primary method of screening. Resolving an ETD alarm generally requires physical inspection (opening Mr. May urged caution on the part of TSA to avoid impos- boxes and removing content), which adds considerable ing requirements that will result in airport cargo facilities delay and cost. becoming choke points and implored the DHS to act imme- diately in three specific areas: Policy Impacts 1. Enlarge rapidly the number of CCSP facilities at large The results of the implementation of the cargo screening shippers. requirements will be difficult to quantify fully for some time, 2. Expand as swiftly as possible the use of TSA-certified largely because the implementation deadline for screening explosive-detection canines to screen large air cargo con- 100 percent of cargo has not yet passed. However, a combina- solidations; and tion of considered opinion offered by government and indus- 3. Provide for additional Federal funding or incentives (e.g., try experts and anecdotal evidence sheds light on what can be tax relief for privately purchased screening equipment) for expected. all TSA-certified indirect air carriers and other qualified CCSP participants. Current Challenges The TSA has acknowledged the challenges associated with In March of 2009, GAO issued testimony to Congress on the meeting the wide-body screening requirements, in particular, state of the air cargo screening mandate.108 In the testimony, and in June of 2009 issued supplemental guidance regarding air carrier compliance. In the document, TSA states GAO outlined the challenges that TSA and the air cargo trans- portation community have experienced and will continue to Shipments tendered on skids and shrink-wrapped (typically face as the August 2010 deadline for 100-percent screening transported on wide-body aircraft) must be taken apart so pieces approaches. Most notably, the testimony indicates that TSA can be screened. Most wide-body cargo flows through freight for- acknowledges it is unlikely that screening requirements will be warders (consolidators), who typically "containerize/palletize" this met by that date. The testimony cites challenges associated with cargo prior to tendering it to airlines. Airlines lack space/facilities to "de-palletize," screen, and re-configure these shipments, so if the implementation of CCSP, the technology options available "airlines only" must screen all such cargo, they anticipate signifi- for screening, the TSA staff available for overseeing certifica- cant delays, increased processing/cut-off times and costs. tion, and the screening of shipments originating outside the United States as significant barriers to meeting the deadline. In forewarning the challenges presented to the air cargo com- Air cargo transportation providers have not signed up for munity, TSA explains that the 50 percent mandate was met CCSP as rapidly as was expected, and even if they had, the GAO without significant challenges, but that shippers, forwarders, report says TSA does not currently have the staff to inspect and and airlines need to be mindful of several issues that will com- certify all of the various facilities that would need certification. plicate compliance with the 100-percent threshold. Namely Furthermore, if large numbers of facility operators wait until The economic downturn caused a 35-percent drop in the 108 GAO-09-422T, "Aviation Security: Preliminary Observations on TSA's Progress movement of cargo compared with 2007, which made com- and Challenges in Meeting the Statutory Mandate for Screening Air Cargo on pliance with the 50-percent requirement easier. Economic Passenger Aircraft," GAO, March 18, 2009.

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61 the last possible moment to enroll, the ensuing rush to gain cer- the program, including: increasing the number of CCSP facil- tification likely will overwhelm TSA's capacity to process them. ities, providing government funding or incentives for the pur- TSA has indicated that it is actively recruiting the necessary chase of screening equipment, and swiftly expanding the use of inspectors, but that there may not be enough to conduct com- TSA canines. pliance inspections of all the potential CCSP participants, For its part, TSA appears to understand and, in large part, which TSA estimates could be in the thousands. sympathize with the air cargo transportation community. TSA has embarked on pilot implementations of technology The agency recognizes that there will be costs associated with and is evaluating the suitability of different technologies, but compliance and that the overwhelming majority of those none of them have completed the qualification process. As of costs will be borne by the private-sector entities that ship, the delivery of the GAO testimony, TSA had not approved forward, and transport goods on passenger aircraft. More any technologies capable of screening consolidated pallets or specifically, TSA acknowledges that costs will be twofold: containers containing multiple commodities. In addition to there will be costs associated with (1) equipment purchase the fact that screening facilities that do not participate in TSA's and implementation as well as personnel and (2) shipment Air Cargo Screening Technology Pilot will not receive any delays caused by bottlenecks in screening operations. TSA public funding to implement technology, the GAO reports established the CCSP to mitigate those costs and expects that, ". . . industry stakeholders expressed concerns about pur- that enrollment will accelerate as the August 2010 deadline chasing technology that is not guaranteed to be acceptable for approaches. use after August 3, 2010." Ultimately, air carriers, freight forwarders, and cargo han- To better understand these specific challenges and their dling facilities concur that they will have the bulk of the burden implications across the air cargo spectrum, the research team for security screening. What that will mean in terms of total relied on a combination of documentation about, and input cost of compliance appears to be very much uncertain. In Feb- provided by, representatives from air transport associations, air ruary 2009, American Airlines announced that it had expended carriers, freight forwarders, cargo handlers, and TSA. more than $3 million in equipment and training to meet the 50 percent screening threshold,110 but very little information Air Carrier Compliance Costs about these expenditures was offered. Asa Hutchinson, chair- man of the Safe Commerce Coalition and former Homeland The screening requirements specified in the law are not Security undersecretary for border and transportation security, accompanied by funding for the implementation of the secu- has stated that to meet the 100 percent threshold, expenditures rity devices or regimen by which the requirements are to be will likely be double those for meeting the 50 percent require- accomplished.109 Hence, commercial airlines and the entities ment, and perhaps more.111 Mr. Hutchinson goes on to specu- that tender freight to them (i.e., shippers and freight for- late that the total price tag is, "impossible to calculate," but that warders) must assume the burden of any costs associated with it will be "costly" for the air cargo industry. General estimates compliance. for equipment prices range from about $35,000 for an explo- Across the board, industry representatives argue that com- sives trace detector (typically used for individual parcel screen- pliance will impose a significant financial burden on the air ing) to $400,000 for a large X-ray machine (to scan palletized cargo community, yet little specific evidence has been made loads).112 The research team's extensive search to retrieve cost available to substantiate or refute such claims. In testimony data for other expenses (e.g., personnel, training, and facilities) provided to the House Committee on Homeland Security in revealed no quantitative data. April 2009, representatives from the Air Transport Association, Public statements by air carriers seem to reveal resignation IATA, the National Air Carrier Association, and several ship- that they will be left to absorb much of the initial costs. How- per organizations suggested that, "Much has been accom- ever, there also appears to be a consensus that these costs will plished in the United States thus far--at great cost to the ultimately be passed on to customers (i.e., shippers and freight airlines." However, the testimony offers no details regarding forwarders) in the form of cargo screening surcharges. To date, actual outlays. The testimony further decries the financial bur- airlines appear to be resistant to be the first to pass along these den that the CCSP, which it cites as potentially "very practical," costs, particularly given the current economic conditions. is expensive for freight forwarders and shippers. Finally, the In fact, industry associations report that shippers are already testimony mentions the challenges associated with screen- ing palletized loads and offers recommendations to enhance 110"Airlines May Struggle with 2010 Cargo Screening Rule (Update 2)," Bloomberg .com, March 18, 2009. 109The Air Cargo Screening Technology Pilot Program provided up to $375,000 111Ibid. for each of 12 technology implementation evaluation projects at freight for- 112"Time to Scramble: Cargo-Screening Deadline Approaches," DC Velocity warder locations. Magazine, January 2009.

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62 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Alaska American Continental Delta Northwest Southwest United US Airways Airlines Airlines Airlines Airlines Airlines Airlines Airlines Source: Air Carrier Financial Statistics (Yellow Book), RITA/BTS. Figure 5-4. Freight revenue as percent of total transportation revenue, 2008. refusing to pay any such surcharges because all-cargo airlines incentive programs, such as reduced shipping rates for pre- do not assess them. screened cargo and more flexible cut-off times for cargo. Still, Individuals within the industry and TSA contacted for this some fear that the cargo that has gone to other providers may study indicated that American Airlines has been very active in never come back in significant numbers. From the industry implementing screening technologies and processes and has perspective, any loss in revenue or profit would not be a large been working actively with supply chain partners to achieve the proportion of their income. For most passenger carriers, August 2010 goal. Southwest Airlines, also referenced by sev- cargo is less than 5 percent of total revenue (see Figure 5-4). eral study interviewees, has only narrow-body aircraft and has Nonetheless, when profit margins are close, small decreases at apparently made the necessary investments to fully screen all the margin can be damaging. of the cargo carried by its fleet. As of this writing, efforts to gain additional information from both airlines have been unsuc- Delays cessful. Other airlines (i.e., Continental and Lufthansa) have been cited as being active in pursuing compliance with the In addition to (1) loss of revenue because of competition screening rule.113 and (2) increases in costs for screening systems, personnel training, and incentive programs, "They should also expect costly delays," says Steve Burke, senior vice president of East Air Cargo Market Share Coast Airport Services, which handles cargo for several air- Should one or two large airlines impose cargo security lines. His six-door facility adjacent to Boston's Logan Interna- screening fees, others will be likely to follow, and shippers and tional Airport handles about 4 million pounds of freight each forwarders will be forced to pay these fees or move their freight month, the majority of it on skids or pallets. Once the law is in to all-cargo carriers. However, according to representatives full effect, efficiency and timeliness will be a thing of the past, from air transport associations, this would further diminish the he predicted at a recent symposium. "Instead of unloading competitiveness of the commercial passenger carriers because 10 skids off a truck, I'll be unloading and checking in 1,000 their service has historically provided a cost advantage over loose pieces. Trucks will be backed up around the block wait- all-cargo services. Passenger airlines will then be left to rely ing to unload." Adding capacity is not an option for Burke's on quicker delivery--the result of the lack of a need for an company, which lacks both the physical space and the money overnight sort--as the primary differentiator. In an air cargo for more dock doors, dock workers, and screening equipment. market that some estimate is down by 30 to 35 percent, com- With many other air-cargo facilities around the country fac- petition is intense, and an overall soft economy has shippers ing similar constraints, he said, the effects could be "earth- that routinely ship by air increasingly using trucks for delivery. shattering."114 This combination of circumstances has airlines implementing 114"Time to Scramble: Cargo-Screening Deadline Approaches," DC Velocity 113 "TSA Belly to Belly Takes Hold," Air Cargo News, July 20, 2009. Magazine, January 2009.