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Air Cargo Transportation in the Next Economy FREDERICK W. SMITH The notion that the services industries of today are the cradle of the "next economy" is an accurate and important assessment: high-quality services and the advanced technologies they employ will provide the bedrock for U. S. domestic economic progress, achievement, and excellence in the twenty-first century. Similarly, U.S. services industries will play a central role in an increasingly integrated world economy. The revolution in information technologies has captured the imagination of people everywhere. The so-called information age has inspired all kinds of predictions about the impact of instantaneous, worldwide communications. The rapid erosion of the relevance of world geography by communications technology spawned a new phrase, "the global village." During the same period, however, another industry with equally far-reaching possibilities was emerging: express air cargo transportation. Compared to the information industry, much less has been written or said about the air express industry and its impact on global economics. In particular, few people seem to have noticed the economic significance of express carriers in important emerging management practices in distri- bution and logistics. The concept of just-in-time (JIT) inventory management, in which the materials of production are scheduled to arrive when they are needed in the production process, is a simple idea with enormous implica- tions. In an economy focused on keeping inventory lean, air cargo trans- portation equipment and systems become "flying warehouses" accessible, secure, 500-mile-an-hour storage facilities for those items somebody wants to use tomorrow. 160

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AIR CARGO TRANSPORTATION IN THE NEXT ECONOAlY 161 The typical distribution system is paper- and people-intensive and orga- nized to deliver goods in weeks or months. Errors, delays, and large inven- tories are the norm. Yet what would happen if goods could bypass traditional on-site storage, with the attendant recordkeeping and accounting, and instead be stored and shipped in a continuing process that uses computer-based express air transportation equipment? The possibilities boggle the mind. Components made in Chicago today could be on a merchant's shelf in Frank- furt, Germany, in 48 hours routinely. The concepts of product velocity and zero inventory are relatively new, and the ability to manage the flow of information throughout the product cycle, from purchase order to shipping documents and at all steps in between, on a global scale is just now coming of age. JIT and air express are in the forefront of that new era. If information technology created the concept of a global village, then express air transport technology is creating the concept of the global factory and the global store. The vision of a just-in-time economy is not some farfetched dream, but rather a simple step beyond where we currently stand. To understand what still needs to be done, it is important to look back briefly at what has already happened in cargo transport. THE DEMAND FOR EXPRESS SERVICE AND THE FEDERAL EXPRESS EXPERIENCE Until the early 1970s, cargo fell into three basic classifications: (1) bulk and fluids, primarily agricultural or mineral products, carried by water or rail; (2) freight, including both industrial and retail goods, carried primarily by surface motor vehicles to intermediate stages in the distribution chain; and (3) letters and routine, low-priority parcels in support of, for the most part, retail trade. However, by the 1970s the need for a fourth classification began to emerge: express carriage. The express segment filled a need for transporting high-priority items for all economic sectors: commercial, gov- ernment, and consumer. Obviously, there has always been a demand for priority shipping services. In the past, pony express, clipper ships, and Railway Express have all played a role. However, with the incremental advances in electronics and microchip technology, the increasing sophistication of markets, and the economic in- terdependence of regions, the unserved demand for a new kind of "priority" increased rapidly after World War II and reached a peak in the early 1970s. The express segment that emerged was one in which nonperformance by the ~c' En ,,^..1~1 hero covers. ~.or~n`)mic consequences upon the shipper, to; ~11~1 lo U11115 ~~ ~ ~~ ~~-~ ~^A~_~ or - the consignee, or both. Federal Express developed as an innovative idea in response to these new demands for performance in the air cargo industry and the opportunities they presented. The mandate was simple: to move an item from one point to

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162 FREDERICK W. SMITH another with speed, efficiency, and predictability. Yet while the mandate was simple, its implementation was a major challenge in logistics: custodial treatment of packages, absolutely accurate records, and instantaneous tracing capabilities were new ideas in the express cargo industry. Federal Express was quick to recognize that the new market segment would almost always demand a short-time delivery. Furthermore, the new market expectations demanded marked improvement in services at every point in the distribution system; access to, and utilization of, a highly sophisticated national and inter- national information network; better logistics support systems; better transportation systems in general; state-of-the-art technologies for every critical step; a highly skilled and motivated work force; and an ability and willingness to innovate. With the enormous growth of computerization, automation, and mecha- nization that began in the late 1960s, no other response would have been sufficient. The transportation landscape was changed forever: consistent and predictable overnight cargo delivery on a national and, later, interna- tional scale was a major breakthrough for the U.S. economic system. Such an undertaking required a do-or-die commitment; a corporate phi- losophy based on people, services, and profit; and a commitment to devel- oping and applying new technology. As a result of those commitments and its basic philosophy, Federal Express has grown from delivering a handful of packages on the first day of operation in 1973 to handling almost a million shipments daily. Its substantial aircraft fleet provides services to over 100 countries. Surface vehicles are equipped with computers that are connected to an on-line data processing system by digital radio and satellite links. In addition, Federal Express's overnight service. r~.~rhe~ He do burro' rep the U.S. population. ~ . . ~ O ~ v ^~~ ~} ~ ~ ~~! ~~11L ~1 Federal Express expects continued dramatic growth. There are several reasons for that optimism. One is that the air express industry is well-posi- tioned to benefit from the trend toward more widespread use of just-in-time delivery. The technology and equipment are in place. It is only a matter of time before the business logistics community makes the necessary adjust- ments to fully implement JIT. Another reason for the optimism has to do with the enlightened attitude toward the "services" part of the phrase "services economy." When that phrase came into vogue in the early 1980s, too many people equated a services economy with retail clerking, janitorial services, and the like: Some even feared that services would supplant manufacturing, that the United States would become a nation of people who would serve each other hamburgers

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AIR CARGO TRANSPORTATION IN TlIE NEXT ECONOMY 163 or take in each other's laundry. Fast food, shoe repair, and dry cleaning are indeed services, but so are transportation, communications, health care, and finance. The rapid growth in air express and other high-value-added, technology-intensive services has given new meaning to services in our eco- nomic lexicon. In air express services, the product is convenience, efficiency, and cost-effectiveness. In this new age, with the high degree of sophistication and competition in the express segment of the transportation market, the old myths of poor pay, unskilled labor, outdated technology, and static man- agement systems have been dispelled. Indeed, success in this market demands state-of-the-art technology in both equipment and systems, dynamic and enlightened management, and most importantly, people. Technology alone no matter how advanced will not bring success, but with properly motivated people who work in a stimulating environment and have a feeling of direct involvement in the firm's objectives and activities, there is no limit to what can be accomplished. DOMESTIC AND INTERNATIONAL REGULATORY POLICY Although the potential for both national and global gains through sophis- ticated express cargo operations is becoming recognized, restrictive domestic trucking and outdated international aviation treaties continue to hamper over- all economic growth. Domestic Regulation When the U.S. Congress deregulated air cargo transport in 1977 and interstate trucking in 1980, it helped to create exceptional opportunities for risk-taking entrepreneurs in the cargo transportation industry. For one thing, competition increased. Since airline deregulation, air express industry revenues increased almost sixfold. Today, this is a $7-billion industry and over 500 million shipments are moved in the United States each year. Between 1980 and the beginning of 1985, the number of general freight surface carriers rose from approxi- mately 18,000 to more than 30,000, an increase of almost 70 percent. More importantly, the number of carriers authorized for nationwide general com- modity services rose from zero in 1980 to 5,400 in 1987 (Rastatter, 19871. As competition increased, prices fell and resulted in savings for both the consumer and the operator; rates fell as much as 25 percent by 1983, only six years after deregulation (Moore, 19831. Equally important, the lower prices forced the industry to become more efficient: new firms entered the market and older firms modernized their air cargo systems by buying or leasing dedicated freighters and building sorting hubs. In short, the industry became driven by customer demands rather than by regulatory dictate. Be-

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/ 164 FREDERICK W. SMITH cause of the lower prices and increased overall efficiency, savings to the national economy average about $50 billion per year (Delaney, 1986~. So the positive effects of deregulation are not pie-in-the-sky notions they are real. Deregulation has also meant better services. A 1985 U.S. Department of Transportation report revealed that surface shippers received better services after deregulation than before and that the biggest improvement in the quality of services was reported by small shippers (U.S. Department of Transporta- tion, 19851. Intrastate Deregulation The other side of the domestic regulatory coin is intrastate deregulation. To complete the domestic deregulation cycle what remains is to deregulate- once and for all intrastate trucking. If the deregulation of interstate trucking spurred economic growth. it follows that intr,~.ctnt~. ~l~~r~1~1utinn ~~,^~llA harry the same eff~.~.t ~ ^ _~ ~~~VI1 VY I Ll1= 11~ V ~ A study performed for Federal Express by Gellman Research Associates estimates that substantial rate reductions can be achieved through intrastate deregulation. Some examples by state are Texas, 33 percent; Washington, 19 percent; Pennsylvania, 15 percent; Ohio, 11 percent; and New York, 10 percent. These figures suggest that there is ample opportunity to lower prices, be more efficient, and improve customer services. No less is at stake than U.S. performance in the world market. The vast majority of goods in intrastate shipping are in reality interstate goods (and, by extension, international goods) that have been temporarily warehoused. Air Transport Treaties and International Air Cargo Markets The factors that created the express market here in the United States are already at work internationally. In addition, the transnational integration of production is creating pressure on existing economic, social, and industrial practices in nations trading in world markets. It would be sheer folly to ignore these developments. Figures from the U.S. Department of Commerce show that in 1986 the value of goods moved by air transport both exports and imports, excluding mail increased by $10 billion and $11 billion, respectively (U.S. Department of Commerce, 19861. Moreover, a study by the U.S. Departments of Transportation and State on international air cargo markets shows that although U.S. carriers still move more air freight than airlines of any other country, they have not participated in overall market growth to the same degree as.their foreign competitors (U.S. Department of Transportation and U.S. Department of State, 1988~. According to that report, U.S. carriers now transport 14 percent

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AIR CARGO TRANSPORTATION IN TlIE NEXT ECONOMY 165 of global air freight, down from 21 percent 10 years ago. By contrast, foreign carriers now haul 69 percent of the air commerce moving to or from the United States, up from 58 percent a decade ago. From 1970 to 1986, the value of goods transported by air for U.S. exports increased by a factor of 10, and the value of goods imported by air transport into the U.S. marketplace increased by a factor of 20 (U.S. Department of Transportation and U.S. Department of State, 19881. The U.S. carriers are getting far less than just a smaller piece of the pie. This is true despite the fact that the United States leads the rest of the world in small-package and air express services innovations (U.S. Department of Transportation and U.S Department of State, 19881. So while the next economy is dawning, there are significant problems still facing U.S. airlines, forwarders, airports, and aircraft manufacturers that need to be addressed if the United States is going to correct the existing competitive imbalance. Most regulation of international air transportation is totally at odds with the demands of the express cargo marketplace. At a time when there is a critical need to recognize the different toutings, physical characteristics, urgency, and schedules required for the flow of express materials, U.S. companies are hampered by archaic, bilateral air transport treaties. Such treaties were developed around the needs of passenger services with no regard for the type of new market demands inherent in air express cargo transport. If U.S. carriers are to compete worldwide on a "level playing field," a number of significant problems will have to be resolved, but they revolve around one theme: U.S. government's responsibility to negotiate forcefully with foreign nations on trade agreements. U.S. trade negotiators need to be aware of the opportunities that the nation is missing in international trade. Once enlightened, they can then begin to focus on the real issues: Customs must be liberalized. Moving express documents is an integral part of a growing international market, but current country-by-country postal, telephone, and telegraph regulations are antiquated and monopolistic and so prevent the expeditious flow of time-sensitive materials. Moreover, customs operations that still focus primarily on the movement of bulk and freight- and to a lesser degree, traditional postal services- also slow the movement of goods between nations. Trade agreements must be reworked. Existing bilateral trade agreements are not consistent with the needs of the express cargo marketplace; treaties that focus solely on passenger services needs must be overhauled to account for the needs of the modern air cargo market in terms of route structures, physical characteristics (especially size and weight), and the urgency and schedules required for an uninterrupted flow of express materials. U.S. trade officials must be more actively involved in the real world of

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166 FREDERICK W. SMITH international trade. First, the United States should constantly review and, if necessary, update its own international trade policies to keep them current with the realities of the marketplace. Next, the United States needs to im- plement a system of monitoring the many and varied trade policies of other nations and to negotiate changes where necessary to ensure equitable U.S. participation in the world market. Technological change in the capability of transportation systems is creating an era in which economic opportunities abound. The express segment of the cargo transport industry is poised to make even greater economic strides once the pathway to success is cleared of outdated government-to-goven~ment agreements. History has generally shown that nations that fail to recognize the value of trade wither and die. What is at stale here, however, is the opportunity to create jobs and the opportunity to improve prosperity both in the United States and around the world. With a global population likely to increase by more than a billion people over the next decade, the need to do so is para- mount. REFERENCES Delaney, R. V. 1986. Digging deeper: A review of the managerial and financial challenges facing transport leaders. Transportation Quarterly (January):6. Moore, T. G. 1983. Rail and truck reform The record so far. Regulation (November/De- cember):38. Rastatter, E. H. 1987. The changing environment for motor carriers. Cited in Defense Trans- portation Journal (December): 13. U.S. Department of Commerce. 1986. Highlights of U.S. Import and Export Trade. Report FT990 December 70-86. Washington, D.C. U.S. Department of Transportation. 1985. Five Years After the Motor Carrier Act of 1980: Motor Carrier Failures and Successes. Washington, D.C.: Government Printing Office. U. S. Department of Transportation and U. S. Department of State. 1988. An Analysis of United States International Air Cargo Market, 1975-1986, Vol. I. Washington, D.C.