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Press Release

Destination unknown
(March 10, 2003)

By William Armbruster
Journal of Commerce Week

U.S. air carriers reported that international freight and express traffic in January was 9.4 percent higher than in the same month last year, while domestic volume was up 6 percent. In addition, several carriers, including foreign airlines, reported strong volume in February. Much of that additional international traffic, however, was tied to the military buildup in the Persian Gulf. The threat of war prompted many commercial shippers to postpone new orders. Meanwhile, war clouds have led to soaring fuel prices, while the threat of terrorism is almost certain to result in new security mandates. As a result, this year could be as difficult as 2001 and 2002.

Small and mid-sized forwarders that don't have the same resources as their large multinational counterparts will find it especially challenging to come up with the resources to invest in technology to cope with new security requirements imposed by U.S. Customs and the Transportation Security Administration, both of which are now part of the Department of Homeland Security. "It's evident that Customs will require advance manifest information," said David Wirsing, executive director of the Airforwarders Association.

It's unclear how far in advance that information will be required by Customs, now known as the Customs and Border Protection Service. An earlier proposal requiring details on standard shipments 12 hours be-fore the aircraft is loaded, with an eight-hour window for express shipments, drew a storm of opposition. Customs hastily withdrew that so-called strawman proposal and is working with an industry coalition on revised standards. The industry group, called the Commercial Operations Advisory Commission, is due to submit its recommendations on March 14.

With Customs and the TSA both domiciled under the same agency, chances for uniform standards should improve. "We're looking to see harmonization of security programs between Customs and TSA," Wirsing said.

The TSA has embraced the global known-shipper program, an automated database developed by the airlines and the forwarders as a way to make it easier for all parties involved in airfreight shipments - shippers, forwarders, carriers and consignees - to respond to tighter security mandates imposed after Sept. 11. The known-shipper program, however, is not yet part of Customs' requirements, Wirsing said.

Despite the challenges facing them, Wirsing said he is optimistic that small and medium forwarders can survive. "I don't believe they're as vulnerable as some would believe. Whenever we have these downturns, naysayers say there will be consolidations, mergers and acquisitions and shutdowns. It just doesn't happen that much. Small and medium forwarders are resilient and can provide a flexible service that others can't. That's a continuing benefit in a down economy," he said.

Brandon Fried, chief operating officer of Adcom Worldwide, said niche marketing is the key for small and mid-sized forwarders trying to compete with the big guys. "If you're going to be all things to all people, you're mixing a recipe for disaster," said Fried, who is also chairman of the Airforwarders Association.

Fried's office in Alexandria, Va., for example, specializes in trade show and exhibitor marketing. But he adds that forwarders need to be creative and to investigate opportunities for other services such as pick-and-pack and warehousing that complement their main forwarding business. "At my company, we're looking at everything. We're talking to customers and asking what processes they use that might be costing them more money than it should and that we could possibly take over," he said.

One example of success was an Adcom customer that performed pick-and-pack services in its own warehouse. "It was costing them a lot of money. We took it over, which ultimately produced more shipments for our firm and reduced their costs. In busier times, I never could look at that type of scenario," he said.

Adcom, which is based in Edina, Minn., and has 30 stations in the U.S., with total annual revenue of about $35 million, is performing such services around the country. "Our owners have decided that we need to be more full service. The advantage of being small is that we can make decisions quickly. We're not tied to bureaucratic rule-making. That can be the downfall of large companies," he said.

But mid-sized forwarders that try to offer full-service operations should be careful, said Manfred W. Engst, president of Adi Management Consult Inc. in Oceanside, N.Y. "They don't have the buying power of the big guys," said Engst, a former chief operating officer of Schenker Inc. Nor can they offer global networks or provide the electronic technology that large forwarders can provide, he added.

Smaller companies, however, will have a place as long as they serve a special niche, either by trade lane or by product, Engst said.

That's the strategy of National Air Cargo, a forwarder based in the Buffalo suburb of Orchard Park, N.Y. "Our specialty is expedited heavyweight and oversized cargo," said Mick Cihak, president of the company and the Airforwarders Association. "It's a question of how you market your service and how you perform. I keep hearing from customers that

customer service is lost with a lot of the big forwarders they deal with," said Cihak. "I think it stems from one-stop shopping. Intimacy with customers gets lost. There are customers that require that and are willing to pay for it."

Forwarders may lose their ability to provide personal service and make quick decisions when they are part of large organizations. CF Airfreight folded last November because its customers fled after its parent company, trucking giant Consolidated Freight-ways, shut down over Labor Day weekend. Being part of a large organization also did not work for USF Worldwide. Parent company US Freightways, another large trucking company that got into the forwarding business during the late 1990s, cut its losses by selling USF Worldwide last October after losing tens of millions of dollars on the venture.

CF Airfreight, known as Flight Masters/Sea Masters prior to its acquisition by Consolidated Freightways, and USF Worldwide, previously known as Seko Worldwide, were successful mid-sized forwarders before their takeovers. At the time of the acquisition, Rich McCrady Sr., president of Flight Masters/Sea Masters, insisted that the resources of the parent company would enable the forwarding unit to expand much more rapidly than it could on its own. In the end, of course, it was the parent's woes that dragged the forwarding business down.

But McCrady, who is vowing to make a comeback, could take heart from the experience of former Seko Worldwide executives who formed a new company last year called CGL. Based in the Chicago suburb of Downers Grove, Ill., it now has 10 offices. Meanwhile, Bill Wascher, former chief financial officer of the old Seko, who stayed on in that position when the company became USF Worldwide, is now president and chief executive of the new Seko, which has some 30 offices.

While the weak economy, the threat of war and the cost of complying with new security mandates will pose major challenges for all forwarders this year, Greg Burns, an analyst with J.P. Morgan Chase, sounded a hopeful note.

"The 2003 air environment is shaping up to be very positive for the freight forwarders," he said, citing recovering air volumes and the continuing capacity glut on international routes. "That should allow forwarders to achieve good economics on their volumes," he said. Burns said he expects rates to firm this year, but he does not anticipate a sharp sudden increase. As a result, forwarders should be able to easily pass along any increases.

Forwarders can only hope that he's right. 

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