COMMENTARY : Deal Shows Why U.S. Will Control World Air Freight
In the old days, in a slower, and perhaps a gentler time, kids used to learn about the world from stamp collections. Nowadays they could get a better education studying international business, where there was action on Monday in global air freight.
Consolidated Freightways, a big trucking company with an air cargo division, agreed to buy Emery Air Freight for $230 million only two weeks after Federal Express, the overnight package carrier, got government permission to go ahead with its $760-million purchase of Tiger International.
What’s going on? Competitors are seeking to better their position in the global air cargo business, which now totals $25 billion in annual revenues, by one estimate. It’s a business moreover that is growing 15% a year because it is particularly suited to these times, when suppliers everywhere are being called upon by customers to assure 24-hour delivery.
When a plant in Ohio needs just-in-time, 24-hour delivery of auto parts from Japan--the solution is air freight. And air freight moves the goods when an apparel house in Manhattan needs 24-hour delivery of dresses from Hong Kong. Computers and machine parts travel by air these days because the value of the work the machines are doing far outweighs the extra cost of air freighting.
In fact, the global air cargo business is a good example of the international competition in services, a vague, academic-sounding phrase that doesn’t even start to describe the demanding, competitive business of making deals and moving cargo in and out of airports around the world.
It’s a business in which U.S. companies have a leading edge, thanks to their training in the hurry-up U.S. market and to U.S. business’ greater usage of computers. If a company can keep track of cargo globally the way Federal Express keeps track of packages domestically, it’s ahead of most of the world. Or, put another way, communications and information, as much as aeronautics, are the skills of global air freight.
The U.S. contingent is big. If Monday’s deal goes through, CF Air Freight will acquire the far larger business of Emery to become a $1.6-billion global power. Along with the $5-billion-plus combination of Federal Express and Tiger, that will give U.S. business two major players in global air freight, and several sizable ones--including Seattle-based Airborne Freight, at $760 million in revenues; Burlington Express, the $500-million subsidiary of Pittson Co. that two years ago bought WTC Corp., a La Jolla freight forwarder, and the package-delivering giant United Parcel Service, which is an $11-billion (revenues) private company.
Foreign competitors include Britain’s package delivery company, DHL, and Japan’s All Nippon Airways, which carries a lot of freight. In addition, of course, the world’s passenger airlines are happy to make extra cash carrying freight.
But profit has been hard to come by in either global package delivery or the heavy freight business of Emery and Tiger, where charges run $1.10 a pound for shipments of 100 pounds and up. Tough competition and government tampering have led to worldwide losses. Japanese protective regulations stymied Federal Express, one reason the Memphis-based company bought Tiger, which has decades of operating rights in Japan. And CF Air Freight may run into bureaucratic interference trying to take over Emery’s operating rights in Japan and Brazil.
Business Gets Better
Also, air freight in the rest of the world still works mostly through freight agents, who put together shipments and contract with air carriers. It’s a slower, and more expensive way to move cargo, but customs die hard, especially overseas. As a result, price cutting in the scramble for cargo work has caused losses and cast a shadow on the business.
Emery, which has lost more than $80 million in the past three years, was shopped around to 144 potential buyers without a taker, according to one industry insider. CF Air Freight bought Emery and its valuable international routes and connections cheap--the $7.75 a share it is offering is less than the $8 a share the same buyer is reported to have offered last year.
So where does the business go from here? It gets better, say analyst Mike Walker of Baltimore’s Legg Mason Wood Walker, an investment and brokerage firm. He believes that the mergers taking place will strengthen U.S. companies, bringing them to a size at which they’ll be able--with further acquisitions of key freight forwarders and carriers in different lands--to put together a global network.
Ultimately, the prospect is for U.S. firms to dominate the worldwide cargo business because of their abilities in computer software and communications--the skills that spell competitiveness in international services
