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7

7.1 Introduction

Air cargo is defined in North America as anything other than persons or per-sonal baggage traveling by air. Compared with other means of freight transpor-tation, such as ship, rail, and surface vehicles, air cargo is the newest addition to the freight sector. Since its start just after World War I, the air cargo industry has become an indispensible part of the worlds global economy, holding an important niche in the transport of lightweight, high-value commodities. Us-ing the infrastructure largely put in place by public agencies for air passenger travel, such as airports and air traffic control systems, air cargo services con-nect to almost all parts of the world.

This chapter examines the characteristics of the air cargo industry. Section 7.2 describes the historical development of air cargo services and the role they play in todays world. Section 7.3 describes the major players and the different business models found in the air cargo industry. Section 7.4 presents key de-scriptors of the air freight network and service characteristics, such as the use of major hubs and different aircraft types. Section 7.5 discusses the economic importance of global trade to the industry, with Section 7.6 discussing the dif-ferent elements of successfully managing air cargo. Section 7.7 presents differ-ent global events that have shaped the industry. Section 7.8 identifies current challenges, and the final section identifies potential research topics on issues of importance to the air freight industry.

The Air Cargo Industryandreea popescu, pinar Keskinocak, and Issam al mutawaly

| 209 2010 Eno Transportation Foundation. www.enotrans.comReprinted from Intermodal Transportation: Moving Freight in a Global Economy.

210 | Intermodal transportatIon: movIng FreIght In a global economy

7.2 History of Air Cargo

Although limited air freight services were tried prior to World War I, it was not until the end of the war that such services were first offered in any significant way. Primarily due to the availability of surplus airplanes and trained military pilots, most of those early commercial services were made possible by subsi-dies provided by national governments, most directly by postal services. Allaz (1) notes that four important lessons arose from these early years of air freight services, as follows:

Militaryaircraftwerenotsuitableforcommercialairservice.Althoughthecost of purchasing surplus military aircraft was very low, the maintenance costs, especially for engines, were prohibitively high.

Safeairtravelduringthisperiodneededinfrastructuree.g.,airfields,traf-fic control systems, weather services, marshalling yards. Very little of this was in place.

Thetransportofmailwasthemajor,ifnottheonly,sourceofincome.From1919 to 1939, post offices around the world provided commercial aviation companies with more than half of their revenues.

Commercialaviationwasnotaprofitablebusinessunlessgovernmentsub-sidies or favorable postage rates were used to prop up the service.

Although there were similarities between how air cargo developed in Europe and the United States, there were also some important differences.

7.2.1 Europe

In Europe, civil aviation grew rapidly after the end of World War I, fueled pri-marily by demands from national postal services. The first cargo-only, sched-uledcommercialaircompanybeganservicebetweenParisandLille(France)in July 1919. Aircraft that transported passengers during the day were often used for mail and freight transport at night. Lufthansa, founded in 1926 in Ger-many, started dedicated air freight services in 1928.

Great Britain, France, and theNetherlands still had colonies during the1900s, which gave their governments a vested interest in maintaining reliable and relatively fast connections. However, a government study in Great Britain in 1923 concluded that a myriad of smaller companies were not economically suited to fulfill the national goal of linking all parts of the empire into one air transportation network. With the promise of major subsidies, many smaller airlines agreed to merge, forming Imperial Airways Limited. Imperial Airways soon operated in all corners of the British Empire, transporting mail and goods between Londons Croydon Airport and destinations such as Cairo, Sydney,

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Delhi, and Basra. In 1939, after the outbreak of World War II, Imperial Airways was nationalized and merged with British Airways Limited to form a new air-line,BritishOverseasAirwaysCorporation(BOAC),apredecessoroftodaysBritish Airways.

Because European governments considered air cargo a matter of national security and sovereignty, those airlines starting as private entities were eventu-ally nationalized. They would not be privatized until the 1980s, ushering in an era of alliances and mergers.

7.2.2 United States

In the United States, the first practical demonstration of air freight transporta-tion took place in 1910, when a department store shipped a bolt of silk by air from Dayton to Columbus, Ohio. (2) The first dedicated air postal service oper-ated by the US Army began in July 1918 with service between Washington, DC, Philadelphia, and New York City. In 1924, the US Postal Service inaugurated the firsttranscontinentalpostalservice,connectingNewYorkCitytoSanFrancis-co. The trip took 34 hours and 45 minutes in one direction, and 32 hours and 21 minutes in the other (by comparison, the fastest train serving the same cities took91hours).SimilartotheexperienceinEurope,postalservicewasthefoun-dation of air freight in those early years. The rapid growth in air mail service is evident in the number of letters carried by airplane; in 1918, 713,240 mail pieces were transported; by 1927, the number had skyrocketed to more than 22 million.

Between 1926 and 1934 the aviation network in the United States changed dramatically.Fromaservicealmostexclusivelyusedforthetransportofmail,the air network system evolved into the largest passenger and cargo network in the world, served by a few airline companies. The Air Commerce Act of 1926 is often considered the foundation for a continental air cargo system. This act established regulations concerning the licensure of pilots, standardized the rules for air traffic control, and specified the varying roles of airports in a na-tional system. By the start of World War II, the US air transport system was the largest in the world, handling more than half of all global passenger trips and just over one-third of mail traffic.

On December 23, 1940, United Airlines inaugurated what many historians consider the first all-cargo service in US history. United used a Douglas DC-4 aircraft to deliver mail between New York and Chicago for five months before cancelingtheroute.FreightwentbacktobeingasidelineoperationuntilMarch14,1941,whenAirCargo,Inc.,wasformedbythebigfourairlinesUnited,American, TWA, and Eastern. By the end of the war, many airlines (including UnitedandTWA)hadbeguntheirowncommercialairfreightservices.

Realizing the likely importance of global aviation after World War II, President Roosevelt hosted in 1944 an international conference on civil avia-tion, the result being an internationally agreed upon set of principles and

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rights for civil aviation in the post-war environment. This agreement, often referred to as the Chicago Convention, created the International Civil Avia-tionOrganization(ICAO),definedstandardapproachestointernationalairnavigation, and affirmed the rights of countries to protect their own interests in granting landing rights.

By the late 1940s, the air freight market was dominated by established pas-senger carriers. The airlines that formed Air Cargo were particularly worried thatsmall-timeoperatorssuchasSlickAirwaysandFlyingTigerLinewoulddestabilize the commercial aviation sector by offering irregular services at low rates. Through the late 1940s, the smaller operators, the established carriers, andthegovernmentsCivilAeronauticsBoard(CAB)debatedhowtoawardcontracts and set proper rates for freight transport. In August 1949, CAB gave permissionforfourall-freightairlinestooperate:Slick,FlyingTiger,USAir-lines, and Airnews. (2)

US Airlines quickly folded after a series of accidents and the threat of bank-ruptcy. Similar circumstances caused Airnews to go under in June 1951. Slick Airways sustained moderate growth for a time before shutting down due to the airlines inability to compete with big passenger airlines that had introduced all-freight services. Slick Airways cited the governments lack of support for all-freight airlines as a contributor to the companysdownfall.FlyingTigerfaredincrediblywellcomparedwithitscompetitors;bythemid-1960sFlyingTigerwasearninga$20millionannualprofit.FlyingTigerssuccesswasat-tributed to its business model, which had diversified its market share, and to favorable CAB judgments. (2)

In the 1970s, a new airline revolutionized the air freight business. FredSmith,nowthechairman,CEO,andpresidentofFedEx,hadthevisionofanovernight delivery service. He was the first to recognize the opportunity pre-sented by an all-in-one cargo transportation service that would eliminate the need to combine freight with passenger traffic, which in his opinion slowed downcargodelivery.SmithsetuphisheadquartersinMemphis,Tennessee,and the Memphis International Airport became the hub for his exclusivefreight air delivery service. One of the most important selling points was his guaranteednext-daydelivery.FedExreportedrevenuesof$1billionin1983,anunheard of amount for a company that had existed for only 10 years. It is now the largest overnight express deliv