Eric Joiner's Freightdawg.com - The Logistics and Supply Chain Blog!

UPS and Teamsters form 5 year agreement

Reuters is reporting this evening that UPS and the Teamsters have reached a tentative agreement forming a new 5 year agreement.   While the new agreement may include new wage increases and healthcare concessions, the key issue is the UPS participation in the Central States pension.

UPS is the largest employer of Teamsters, as a result, the agreement drives all other Teamster contracts.   Exiting the Central States pension plan is key for UPS because as the largest teamster employer, UPS would have to underwrite the viability of the pension plan it participates in.   Under a new agreement, UPS has sought to form a new pension plan for its drivers only. 

If the UPS/Teamsters plan is settled as expected, the 2008 Teamster master contract can be settled. Traditionally the master contract has followed settlement of the UPS contract so that new terms and conditions can be adopted.

clipped from www.reuters.com NEW YORK, Sept 30 (Reuters) - United Parcel Service Inc. (UPS.N: Quote, Profile, Research) on Sunday said it reached a tentative, five-year agreement with the union that represents around 240,000 full and part-time UPS employees in the United States. UPS said the deal includes wage increases and significant contributions to healthcare and pension plans for the International Brotherhood of Teamsters.The agreement allows UPS to withdraw employees from the Central States pension plan and to establish a jointly trusteed single-employer plan for this group. UPS will make a pre-tax $6.1 billion payment to the Central States plan in connection with its withdrawal.

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Rail Consultant: Rails should adopt Airline Yield Model

Following on my article of yesterday, I noted on the Progressive Railroading.com site that they had an article covering Bill Rennicke's testimony to Congress.   Rennicke is a consultant director at the firm of Oliver Wyman.

Rennicke made some points in front of the House Transportation and Infrastructure Committee regarding  the Railroad Competition and Service Improvement Act of 2007 (H.R. 2125/S. 953).  This pending legislation proposes some controls on railroad pricing.   His key point however seemed to be that railroads should adopt an airline model of yield management.   That idea is flawed in a few ways.

On airline routes, such as Atlanta to New York,  there is consistent and heavy competition.  Further, individual airlines offer multiple flights a day to a passenger base that is widely disparate in its needs.   Thus, it is easy to put in place a pricing scenario that takes into account such things as flight time, available seats, competition, How close to flight time did the passenger book, etc.    Generally it becomes highly need based.  Passenger need to travel vs. Airline need to cover open seating.  This is a highly elastic passenger based economic model.

Railroads deal with customers who buy in bulk, buy long term and on contract.    Key issues become availability of capacity and access to rail lines.   Captive customers are those who have access to one railroad only.  (bad news!).   Non-captive customers are those who have access to at least two railroads (say, NS and CSX).     That introduces a layer of competition that does provide some boundary to pricing.   There is little resemblance to airline yield management at the flight level toward the railroads.

Where there IS some similarity is in route level pricing by the airlines.  Fly from Atlanta to New York...and the price is around 300 dollars round trip.  Its a highly competitive route but subject to special fares when needed.  Now, try flying from Atlanta to Jackson, MS.   The airfare is 1400.00.    Less than half the distance, four times the rate.    Why?  No competition.   Delta owns that market.   If Southwest decided to fly to Jackson, the prices would drop like a rock.  Now in the Jackson market, there is still a yield management principle involved.  Not everybody pays the highest rate.  However, the floor in the equation is MUCH higher.   In captive markets, rates are higher. That is a mode independent fact.

Congress should get involved in making sure that there is a relative linkage between captive and non-captive rates in the rail market.   The base reason is that barrier to entry is substantial in the rail industry. Railroads own the tracks.   A discount carrier flying into a new market is relatively easier than laying down new rail track.

Eric

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Railroad Profits: Concern for Shippers, Delight to Investors

In recent months I've written about Warren Buffett's Berkshire Hathaway investing heavily in railroading.  They've spent significantly to buy into BNSF.     You can tell that was a right decision when USA Today writes a half page article on rail customers complaining about high rates and poor service.

The September 27th, 2007 article written by Paul Davidson outlined significant pricing differences between movement of goods via captive lanes where one railroad exclusively serves a market, vs non-captive lanes where multiple rail alternatives exist.   Frankly, there is a big demand for rail services in the energy, chemical, grains and other bulk commodity markets.   Demand drives pricing.  In areas where there is limited capacity and/or limited competition rates are going to be high.   

The railroads are said to be "pulling hard on the pricing lever" this year. Progressive Railroading magazine recently had an article that said much the same.   While the railroads are squeezing revenue from customers who are bitter about the exercise, the customers are also seeking other modes of transport.  Trucking and to a lesser extent, pipeline are seeing increased traffic as a result.   

In due course,  alternative modes will provide a limited alternative, but more likely what is going to happen is that Congress is going to get involved in preventing perceived pricing abuse, especially when it concerns energy movement.  The USA Today article pointed out that to challenge a rail rate at the US Surface Transportation Board costs $178,000.00 just to file a rate case.  After which the burden of proof to prove the abuse largely amounts to proving that you could build a railroad without charging a similar price.   (can you say "high barrier to entry?"...no wonder the Robber barons were railroad guys.)

The impact to the public on rail rate increases is measurable. Dairyland Power Cooperative in Wisconsin, raised rates on each of its 500,000 customers $11.00 a month as a result of a 93% rate increase that BNSF put in place in 2007.   The total tab for the coal itself is about $40 million.  The rail cost to transport it...$75 million.

On the basis of the above,  I think Warren Buffett is smart to invest in railroads.   I personally hope the Congress regulates increases.   Otherwise, we have Robber Barons part Deux.

Eric

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GM/UAW Settle Strike after 2 Days

Reuters is now reporting that the United Auto Workers and General Motors have settled the UAW strike after 2 days off the job.   

In a strike that nobody wanted, the deal seems to have been concluded on the basis of a new healthcare package.    Impact to the GM supply chain is likely to be limited but may take as long as a month to put fully back online. 

clipped from today.reuters.com DETROIT (Reuters) - The United Auto Workers union and General Motors Corp reached a tentative contract on Wednesday to end a national strike by 73,000 workers with a deal that includes a groundbreaking health-care trust fund. Union President Ron Gettelfinger, speaking at a news conference at the union's Detroit headquarters, said production at GM facilities would resume on Wednesday, ending the first national UAW strike against GM since 1970 after two days. Gettelfinger said the union expected to hold a meeting with the local unit presidents to go over details of the four-year agreement on Thursday afternoon or Friday morning to allow for local ratification meetings nationwide over the weekend. Ratification requires a majority vote of UAW members."We feel very confident it will be ratified," Gettelfinger said.GM shares jumped 7.3 percent to 26.2 euros in Frankfurt trading after the deal was announced.

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UAW Strikes GM: What are the downstream costs?

As I waited for a lunchtime appointment today,  I saw a television monitor with CNN breaking news coverage of the United Auto Workers Strike against General Motors.  This is the first UAW strike against one of the American Big Three automakers since the early 1970's.   The job action is primarily about job security and benefits management.

Numerous sites will have details of the strike. However my first thought was to wonder what the downstream impact of this strike would be on thousands of other (union and non-union) workers ranging from truck drivers, shipping company employees, railroads and the 3PL's who handle parts and assemblies in the automotive space?   

Surely unionized drivers from companies such as UPS or ABF won't cross the picket lines.  That means freight will either sit in terminals, or be returned to origin.   It is said that GM has the ability to stand a strike of about a week in duration as a result of stockpiled inventory.  However, once that material is used, will that mean an increase in use of air freight to resupply the parts stock once the lines get going again?   Certainly freight stuck on rail cars will clog rail terminals and routes.

Will a strike spread to other UAW contracted automakers?   Contracts at Chrysler and Ford supposedly give a 3 day notice before a strike can be lawfully engaged against the other automakers.  What does a strike do to the numerous local economies where GM is a big employer?   In the present soft economy in the US today, this can't help.   

Where will the cost of this strike wind up?

Lets Discuss:  What impact do you see from the GM strike today?

Add your comment below.

Eric

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Global Air vs. Ocean Freight Growth

I spent all of last week in Seattle on business, culminating with a fantastic tour of the Boeing 737 production line in Renton, Washington.    Looking at how well Boeing has made the great leap in the last 10 years at adopting LEAN production techniques, I got to thinking about current cargo markets and the introduction of more and more wide body freighters to the global markets. Boeing is doing "more" with "less" in terms of manufacturing aircraft.   However the driver behind those exercises is a large and growing global appetite for commercial aircraft. (graph source: Boeing Commercial Aircraft)

International trade has also forced massive increases in available containership tonnage.   The comparison in capacity growth between the two modes is highlighted in the article below from the Boeing web site.

clipped from www.boeing.com While maritime traffic growth has matched overall world air cargo growth in the past decade, international air cargo traffic continues to expand faster than the movement of goods by sea. Air cargo is only one part of the global goods distribution network. Shippers demand that shipments arrive at their destination on time, undamaged, and at a reasonable price, regardless of transportation mode. Different transport modes (road, rail, maritime and air) often can move the same commodities, but for the intercontinental movement of freight, shippers usually have only two choices: air and maritime. Maritime transport offers the primary benefit of lower cost; air transport offers the benefit of speed. The maritime industry, as measured in tonne-kilometers of goods transported, is much larger than the air cargo industry. In 2005, the world maritime industry generated a total of 53.4 trillion RTKs of traffic compared to 178.1 billion RTKs of traffic for the air cargo industry. However, this maritime traffic includes the movement of bulk commodities such as oil, metal ores, and grains, none of which can be directly compared to the higher-value dry commodities associated with transport by air. A better comparison of the air and maritime modes can be made using the remaining maritime dry cargo after these bulk commodities have been removed, which totaled about 16.2 trillion RTKs of traffic in year 2005.              Historically, world air cargo has outpaced maritime growth in these similar commodities, growing 6.4 percent per year from 1985 to 2005, whereas maritime grew substantially slower at 4.8 percent per year. In the past decade, however, maritime traffic has grown at a slightly faster pace than air cargo traffic, averaging 5.4 percent compared to 5.1 percent per year for total world air cargo. The recent surge in maritime transport is due primarily to the rapid growth in container ships (both in size and number), which have increased about 10 percent per year in overall capacity since the mid-1990s.

Update on DHL/Lufthansa Air Cargo Airline Deal

Air Cargo News published additional details on the new JV all cargo airline that DHL and Lufthansa will launch in April of 2009.   Read below to gain further insight.   This is an update to the previous article published here at Freightdawg.com.   

The new company has not yet been named.  Focusing on maximizing capacity, DHL Express will control aircraft routing during the business week, while Lufthansa will control routing and capacity during the weekends.  The all cargo airline will represent a first use of B777 freighter aircraft for DHL.  DHL will use the capacity primarily in the Europe Asia trades, while Lufthansa will use them in other routes including Europe to US routes on weekends.

clipped from www.aircargonews.net 21-Sep-2007: DEUTSCHE Post World Net (DPWN) and Lufthansa, revealed further details regarding their new 50/50 joint-venture all-cargo airline, which had been exclusively revealed by Air Cargo News in February this year. Although yet to receive an official name the airline will acquire 11 Boeing 777-200LRF freighters, in stages, from February 2009. The aircraft will be operated on long-term operational leases, in the region of 10 years, rather than be purchased outright. It was claimed that the new company will become the fourth largest freight airline in Europe. The new airline builds on the relationship that commenced with the Aerologic programme in 2004. Lufthansa fought off competition from Emirates and Cargolux to land the deal as DHL’s exclusive partner in the joint-venture. Based in Leipzig, the company will have a separate identity as a private limited company and will commence operations in April 2009. Both DPWN and Lufthansa will hold a 50 per cent stake, with each contributing equity capital of 25 million euros. The airline will be run by two managing directors, one from each company. Dr Thomas Papke previously served as senior vice-president strategic purchasing, for Lufthansa Technik and will be responsible for the operations side of the airline. Thomas Pusch is director for global purchased air, DHL Express, and will take responsibility for finance, marketing and sales. The driver behind the co-operation is to maximise the use of the aircraft. DHL Express will take the majority of the capacity and dictate the routes flown on Monday to Friday. The routes will be exclusively Europe-Asia and LH Cargo will have access to any spare capacity on the flights for general cargo. At weekends the emphasis shifts with LH cargo dictating the routes, that will include transatlantic destinations, and DHL Express only playing a minor role in filling the aircraft. At weekends, the aircraft will also be available for charter work through Lufthansa’s subsidiary, Lufthansa Cargo Charter.

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DHL and Lufthansa form all Cargo Airline

Today DHL and Lufthansa announced formation of a 50/50 jointly owned all cargo airline.   The new carrier, which starts flights in April, 2009, will feature 11 777-200LRF freighters.    The new carrier, which has not been named, will be based at DHL's new cargo hub in Leipzig, Germany.   

The carrier will service Lufthansa and DHL customers and the space on the aircraft will be marketed separately.    DHL is likely to be a dominant space participant however as DHL Global Forwarding, DHL's heavy airfreight arm, is also major client of Lufthansa.

DHL and Lufthansa also operate a jointly run program for the pharmaceutical industry called Lifeconex, which focuses on logistics and supply chain needs for the life sciences industry.  Deutsche Post WorldNet invests 2.7 Billion dollars into the new air carrier.   This follows taking of a 49% stake in all cargo carrier Polar Air.

clipped from konzern.lufthansa.com Lufthansa Cargo and DHL Express launch cargo carrier Flight operations with new aircraft of the Boeing 777 type to commence from Leipzig/Halle Airport in April 2009 Deutsche Post World Net and Deutsche Lufthansa AG are founding a joint cargo airline through their subsidiaries DHL Express and Lufthansa Cargo. The new company, based in Leipzig, in which DHL Express and Lufthansa Cargo each hold a 50 percent stake, will have the legal form of a private limited company (GmbH). It will focus on transporting airfreight and express shipments into and out of Asia. Flight operations are scheduled to begin in April 2009. With the launch of the new cargo airline, the two partners will further expand significantly their leading position in the airfreight, respectively, the express business. The new cargo carrier will initially operate with eleven new Boeing 777-200LRF aircraft. The aircraft will be leased and are scheduled for delivery from February 2009. The 2/3 cargo capacities of the new airline will be utilised by Lufthansa Cargo und DHL Express. The two partners will continue to take care of marketing and handling those capacities independently. Pending the granting of traffic rights, the new airline will gradually expand its route network from the summer schedule 2009. On weekdays, it will be serving Singapore, Bangkok, Dubai, Bombay, Shanghai, Hong Kong, Seoul, Nagoya, Almaty, East Midlands and Milan. At weekends, it will fly to Shanghai, Astana, Singapore, Bangkok, Sharjah, Hong Kong, Chicago and New York. Aside from pure airfreight traffic, the two companies will each alone be responsible for warehousing and trans-shipment at Leipzig/Halle Airport. DHL Express will handle its express shipments in the newly built cargo centre. Lufthansa Cargo will shortly be building its own modern logistics centre right nearby.

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Ice Melt: Opening of the Northwest Passage

Traversing from the Pacific Ocean to the open Atlantic has been a dream of mariners for decades, dating back to the 19th century.   This route, called the Northwest Passage, via northern Alaska, Canada and Greenland has long been hoped for as the short cut to Asia and the Pacific. 

Arctic explorer Roald Amundsen first successfully navigated the passage in 1905 amid dangerous pack ice.  Other explorers and missions later made the passage but with the help of an icebreaker.  Russian mariners have made the passage on similar routes from Murmansk to the northern pacific but the Siberian route always needs an icebreaker.

Ice has always been the limiter toward arctic navigation across the top of the planet.   Now, with global warming and different seasonal conditions, the passage has now become open to practical navigation at least part of the year.   The European Space Agency this week indicated that sea ice has now diminished to an all time low, allowing potential commercial navigation.  Sea ice is highly sensitive to temperature changes because of its highly reflective whiteness. It reflects sunlight back into the atmosphere which warms the air nearby.

Imagine a container ship transit time from Japan to Hamburg of 14 days?   How about Seattle to Amsterdam in 11 days?    This kind of speed would have serious economic impact not only to supply chains, but would seriously impact the size of the available freight market.   Cargo that went air freight now could potentially move by sea.

The politics of the Northwest Passage will be substantial.  Not only will navigation be impacted by easy access to the sub arctic north, but mineral rights will also become up for grabs.   Canada, the United States and Russia already diplomatically argue over sovereignty of mineral rights.   Denmark, which governs Greenland, also figures to be in the mix. 

Global warming is debated as either a natural or man-made event.  No doubt man contributes to whatever natural trends may exist.   The opening of the northwest passage might be considered a good thing coming from a negative event.  Commercial vessels steaming through otherwise pristine arctic areas however is not a long term positive to my mind.

Eric 

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Tesco Direct Chooses Manhattan

Tesco is a major convenience retailer in the UK and more recently in Southern California.   Tescodirect.com is a website operated by Tesco that allows ordering of products for home delivery in the UK.    To enable the Tescodirect.com ordering capabilities,  Tesco chose Manhattan Associates warehouse management systems to facilitate the unique order picking requirements of direct purchasing, such as picking single items.   This is not something ordinarily done in a distribution center that supports retail stores.    The video below shows how Tesco are using Manhattans tools as a case study.

The video below is embedded from www.yourtechtv.com.  I recommend signing up for this site because they have a complete supply chain management category for video.  I'm a believer in online video as an interesting and instructive communication tool.  You'll see more of these vids on Freightdawg.com in due course.   

(Note: Some corporate proxy servers ban video from some sites such as youtube.com.  If you see white space below...you may be on such a network.  Please revisit from home or a connection that does not go through your company VPN.)

 

 

Eric

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