No one can dispute that last year was a tough one for the airline industry. Layoffs, capacity shortages, and reduced traffic flow pervaded throughout the industry. Combined with the economic downturn, the events of Sept. 11 whipped a double whammy on U.S. air carriers. Security procedures have been heightened in both the U.S. and European sides and even tougher measures are on the way. The well being of air carriers is still an issue affecting shippers. As the economies rebound, some additional challenges facing forwarders and carriers involve better capacity management and more accurate forecasting in the U.S.-- Europe trade lanes.

Closer cooperation between carriers and forwarders leads to better efficiency for shippers. "Cost reduction is the primary focus now," says Ole Ringheim, vice president of global airfreight for Exel Logistics' freight management and technology division. "We are automating the communication processes between forwarders and carriers that can hopefully translate into improved customer service and overall reliability for shippers. Our industry's primary problems are the need to improve forecasting as well as to develop a growing element of risk sharing with carriers."

Evening-Out Capacity

Ringheim says airlines going out of business--such as Swiss Air and Sabena--and reducing service levels won't help anyone in the medium to long term. Overall there has been a capacity reduction of 10 percent in the U.S.--Europe lanes. Currently there is some overcapacity in the U.S. to Europe trade lanes, but not Europe to U.S., due to the trade imbalance.

"U.S. export capacity is not currently an issue, but it could be," Ringheim says. "U.S. exporters are seeing a bit of overcapacity, which has not affected cost or service levels. When there is a pickup in activity, it may become a factor. With the emphasis on time-definite services, service levels must be maintained. In the Europe to U.S. market, capacity should be managed better to the Midwest locations. All flights out of Europe are full. Assuming there is not a lot of new capacity and things will be slow until the end of the second quarter, then there will be space problems."

The Long Arm of Security

According to Ringheim, in the area of cargo security, the Europeans had a head start in securing that part of the supply chain. Security challenges will continue and some are expecting even tougher measures to take place during 2002. Ringheim believes a requirement for the X-ray of all cargo may be implemented this year. "If the cargo isn't X-rayed in the airport, then the freight forwarders would likely do it. If that doesn't happen, then there would be a cooling period where there cargo is held before shipment. Currently some airlines are X-raying their cargo and some aren't."

Philips Airfreight Service, a division of Philips Electronics N.A. located in Manlius, N.Y., ships broadband communication and other electronic products from the Netherlands and Germany to various points in the U.S. Product line manager Bill Adams, says more cargo will be inspected, but it won't be screened: "There is just not the capability to do so. The U.K. regime is a good example to follow, with their known shipper system centralized," Adams says. "The U.S. system is a good first step."

Murray Morgan, director of international operations and sales for CF Airfreight, a global logistics provider based in Minneapolis, agrees, saying some European companies don't understand that there are delays in establishing companies as known shippers. "For example, a U.K. importer needs to be set up as a new supplier in order to be placed in the known shipper system," he says. "The system in the U.K. is more efficient because their known shipper database is centralized with the government."

RND Systems, Inc., is a Minneapolis-based shipper of biological research products to the U.K. and Italy. Transportation manager Shelley Gruenke says, "Security surcharges have not really impacted our logistics costs. We realize that they are a necessary measure due to the events of September 11th."

RND experienced some delays immediately following the attacks. "Our shipments had to go through a different airport, which has caused some delays," Gruenke says. "But after months of this change in airports, we are now scheduled to go back to our normal routine as it was before."

Pricing Factors

Adams says the two most important issues for him concern capacity and market stability. "We have not seen huge imbalances yet, but unless the economy comes back, with more airlines in poor condition and likely to fold, capacity could become an issue," he says. "Security surcharges, which run about 10 cents per kilo, have added an additional 6- to 11 percent to our total logistics costs, and will likely continue. The question is how much is really being burdened on the airlines. Insurance for airlines has gradually been going down, but it seems to remain a revenue stream for carriers. The fuel surcharge has been replaced by the security surcharge."

Adams says his company could likely see a rate increase if demand outstrips capacity, since so much capacity has been taken out. "Rates are fairly low now. Basically it is still the law of supply and demand," he says. "Prices have held up fairly well in the U.S.-Europe lanes, since it is mostly belly cargo on passenger flights."

GlobalWare Solutions, Inc., based in Haverhill, Mass., is a provider of global software contract manufacturing and other services that works with hardware and software OEMs and the electronics manufacturing services industry. The company ships airfreight from its facilities in Redwood City, Calif., Haverhill, Chicago, and Amsterdam. Mike Malone, vice president and managing director for Europe, says the most important issues GlobalWare faces are cost and time-to-market issues. Those are significant in order for the company to maintain its level of customer service.

The company uses air for a minority of its shipments and uses ocean wherever possible. "Utilizing reliable 3PL providers such as FedEx and DHL has helped us to minimize delays and of course making sure that our paperwork is done properly," Malone says. "The airport in Amsterdam, Schiphol Airport, ranks very high for efficiency, which was a major factor in our relocation there from Hoofddorp in order to keep our business flowing smoothly. This is really the gateway to Europe."

Shippers have adjusted to the security requirements imposed, but may need to prepare for additional measures. As the same time, market forces have been balancing out the traffic between the U.S. and Europe trade lanes. Using reliable 3PL providers can provide additional value to shippers for staying abreast of the latest regulations, pricing, and capacity changes.