It is generally understood that what is good for the world economy is good for the air cargo industry. When the economy thrives, deliveries increase. By extension, what is good for the large air cargo players also is good for the smaller cargo carriers operating fleets of regional aircraft.

"The overall picture of the industry seems to be healthy," Stan Bernstein, president of the Regional Air Cargo Carriers Association (RACCA), tells Regional Aviation News as the group prepares for its third annual meeting. "We seem to be doing better with a lot of equipment in the air. There are only a few operators reporting surplus equipment."

Thirty-four of the 49 RACCA-member air carriers and the bulk of its 111 associate members will be meeting in Scottsdale, Ariz., on June 6-8.

As box haulers instead of people movers, the air cargo industry is closely tied to the biorhythms of the manufacturing community - both domestically and internationally - as well as consumer spending trends such as Internet shopping.

In the last 12 months, the amount of cargo shipped by air within the U.S. has increased by about 5 percent, according to Harvey Birdseye, director of aviation education at Lane Community College in Eugene, Ore. Birdseye also tracks the air cargo industry. In the coming year, it is expected to keep on growing "maybe not as fast as in the past, but everything is going up," he said. The 2005 growth rate is projected to be 1.5 percent to 2 percent.

The largest air cargo growth markets in the last year have been capital equipment, which grew at a rate of 19 percent, and computers (13.5 percent), said Forrest Harding, a marketing professor and air cargo industry consultant at California State University at Long Beach. All types of cargo shipped by air continue to grow, he noted.

In 2005, it is estimated that 161 billion revenue freight metric tons per kilometer (RTK) will be carried in the U.S. The volume is expected to increase to 170 billion RTKs next year, Harding said.

RACCA members get a small slice of the business. Three percent of all cargo is moved on turboprop or piston-powered aircraft, said Frederick Roe, an analyst with BACK Aviation Solutions. (Roe has analyzed the industry's current fleet for Regional Aviation News and his findings are part of this report.) RACCA represents about 85 percent of the regional cargo carriers.

RACCA members are divided into four service niches, Bernstein said.

• The largest group of operators flies on a contract basis for FedEx, UPS or DHL. This is a primary niche that will continue to grow, Birdseye said.
• The U.S. Postal Service is the primary client for the second largest group of RACCA members, he said. Moving mail around the country has been at best steady. Some carriers report that the volumes promised by the postal service haven't met expectations. The widespread use of e-mail continues to reduce the number of mailbags that need to be moved, Birdseye said.
• The third segment served by RACCA members is the financial community. The operators move canceled checks and other bank papers each night from bank to bank. Most of these operators are contracted with the Federal Reserve to move the financial papers from one branch of the Federal Reserve to another. Another segment, with AirNet Systems [ANS] by far the largest player, moves cancelled checks from bank to bank. The outlook for this segment is not good with the advent last fall of the Check 21 federal law that provides for the electronic transfer of digitized checks.
• The smallest group of operators specializes in on-demand charters,

Bernstein said. Their missions range from emergency flights to get a missing part to an assembly plant or scheduled shipments of newspapers or medical supplies. This highly specialized niche has perhaps the highest growth potential.

Another sign of good health is that the cargo operators are having a difficult time finding enough pilots, Bernstein said. The carriers are developing relationships with flight schools to provide qualified candidates, he said.

Birdseye noted that in the past five months, eight flight instructors from his program at Lane accepted positions with regional cargo carriers around the country. "It represents an increase in demand for pilots from the feeders," he noted.

Overnight Package Couriers

The overnight package business is shifting. Fewer of the overnight packages contain critical documents and more of them contain critical product parts needed either for repairs or assembly. "The overnight letter is not as strong as it once was," Harding said. "The document stuff is drying up because of the Internet. What you do have increasing is small parts, components and emergency repairs."

While these packages continue to move through the FedEx or UPS network, the odds are increasing that the packages may be moved by truck rather than plane.

"Our primary competitor is the truck," Bernstein said. The integrators are carefully assessing whether to send a package on 90-minute flight or place it on a truck. "'Can we get this on a truck or do we have to fly it?' is the question they keep asking. We have to carefully weigh our costs and keep them under control so they don't get disproportionately high compared to surface transportation," Bernstein said.

Harding added: "A significant trend within the United States is the shift to expedited trucking in the express delivery market. A significant air-to-ground shift has taken place in the last few years, driven by lower cost requirements of shippers and the improved reliability of trucking operations."

In the first quarter, FedEx reported that its ground shipments increased by 25 percent with $240 million in revenues attributed to the ground segment. By comparison, its air express business increased by 12 percent with $541 million in revenues. The daily volume of the ground segment increased by 16 percent while the air express volume increased 6 percent.

At UPS, which has a long tradition of package shipments, the ground business grew by 4 percent in the first quarter with $4.5 billion in ground transport sales. The sales of its express air product increased by 1.3 percent to $1.5 billion in the first quarter. However, the daily express volume dipped by 2.1 percent to 1.1 million packages. The ground business volume increased slightly by 0.7 percent to 10.4 million daily packages.

The regional cargo carriers are not paid by volume or weight, but instead by the number of routes flown, said James Thomforde, president of Wiggins Airways. Business has been "steady" for the Manchester, N.H., regional operator, with the addition of only one new route in the last year, Thomforde said. Wiggins flies routes for FedEx and DHL.

Business has been even better at Los Angeles-based Ameriflight, one of RACCA's largest members. While Ameriflight still flies some bank courier routes, the bulk of its business is now delivering small packages for UPS and DHL.

Ameriflight has purchased 16 new planes in the last five months - nine Beechcraft 99s, three Metro IIIs and four Beechcraft 1900s. "We are in the process of selling off smaller planes," said John Hazlet, Ameriflight's vice president.

"The outlook is a continuation of the same," Hazlet told Regional Aviation News. "It looks to us like it will continue to grow. I don't know if it will grow at the 16 planes-a-year level, but it will continue to grow."

While the bulk of the RACCA membership operates under Part 135, Empire Airlines, based in Hayden, Idaho, and Mountain Air Cargo, a division of Air T [AIRT], based in Denver, N.C., are also certified as Part 121 operators. Both Empire and Mountain Air have begun to fly ATR-42s that have been converted by FedEx into small package freighters. According to BACK's data, FedEx now has 27 ATR-42-300s in operation as freighters and two ATR-72-100s. While FedEx owns the aircraft, it leases them to Empire and Mountain Air.

FedEx plans to replace its fleet of 21 Fokker-27s with the ATRs. At the recent annual convention of the Regional Airline Association (RAA), it was noted that FedEx's appetite for the ATRs has created a shortage of the used aircraft. One FedEx official in the ATR program noted that the company is buying every ATR it can get its hands on - provided the deal is good. Officially, FedEx does not want to talk about the program, even though the planes have been flying since last fall.

RACCA has been working to get the Part 135 rules changed so that its members can fly larger planes like the ATR, which can carry heavier loads. The Federal Aviation Administration (FAA) has just begun reviewing a series of industry recommendations on how the rules can best be modernized.

Postal Deliveries

First-class mail has decreased each year since its peak in 2001, according to the postal service. In the first quarter, it declined 1.3 percent or 315 million pieces compared to the same period in 2004.

Since only the postal service is paying carriers on a per pound delivered basis, less mail means less money. Alpine Air [ALP] has notified the postal service that it wants out of its Hawaiian contract because the volume has been less than what it based its bid on. Alpine won the Hawaiian routes a year ago. The postal service is in the process of rebidding the contract.

Bank Runs

The impact of Check 21 has not yet been felt by carriers working under Federal Reserve contracts, said John Dickerson, president of Bankair, based in West Columbia, S.C. The firm flies 16 planes for the Fed.

Check 21 so far has had "no discernible impact on regional or national check transports," said Pierce Nelson, a spokesman for the Federal Reserve in Atlanta. While its network of cargo carriers move 50 million checks nightly, it has seen only about 600,000 Check 21 substitute documents each day. Nelson said Check 21 eventually will nullify the need for the nightly check runs, but he declined to predict when.

In the case of AirNet, which moves checks between commercial banks, it has already been notified that it can expect revenues to drop by nearly $7 million this year based on canceled contracts. In the first quarter, AirNet reported its bank service revenues were up 5.4 percent to $27.2 million due to fuel surcharges it imposed on its clients.

Ameriflight, which handles accounts similar to AirNet's, has seen a shift in business since Check 21, Hazlet said. "We are seeing some changes that will cause us to do some changes," he added.

With the prospect of losing business over the next several years, several bank couriers are exploring new niches, said Carl Bennett, president of the Ohio consulting firm of Transportation Resources Partners. The growth niche will be specialized charters, such as those carrying radioactive pharmaceuticals, or dangerous or hazardous substances. "The operators need to chase real-time sensitive stuff. Items that trucks don't do or regular carriers can't do," Bennett said.

To be successful in these niches, Bennett said the operators need to go beyond knowing and abiding by the intense regulations. "It takes someone with real operational savvy and strategy. You have to be able choreograph the right planes, crews and locations to move the product before it is useless," he said.

>>Contacts: Stan Bernstein, RACCA, (508) 778-7788; Frederick Roe, BACK, (203) 752-2000; Harvey Birdseye, Lane Community College, (541) 463-4302; Forrest Harding, CSU-Long Beach, (562) 985-5454; John Hazlet, Ameriflight, (818) 980-5005; James Thomforde, Wiggins, (603) 629-9191; James Dickerson, Bankair, (803) 822-8832; Pierce Nelson, Federal Reserve, (404) 498-8748; Carl Bennett, Transportation Resources Partners, (614) 755-4980.<<