Rakesh Shalia

Manager – Strategic Market Analysis

March 18, 2005

30th Annual FAA Aviation Forecast Conference

Coping With U.S. International Air Cargo Trade Imbalance

U.S. trade gap was record high in 2004. It rose to 24.4% U.S. annual goods deficit has been increasing since last ten years. In 1995 the goods deficit was 13 % and in 2004 it was 29.2 %

U.S Trade Deficit

U.S. International Trade in Goods(Balance of Payment terms in $ in Billions)

$ 808 B

$ 575 B

$ 749 B

$1,474 B

$ 666 B

$ 174 B

-

200

400

600

800

1,000

1,200

1,400

1,600

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

An

nu

al f

igu

res

in $

in B

illio

ns

Goods Exports

Goods Imports

U.S. Goods Deficit

Imports

Exports

Deficit

Data Source: Commerce Department

Data Source: U.S. Bureau of Economic Analysis

During 1995 there was no issue about air trade imbalance In 2004 the trade imbalance ratio (Import/Export) was 1.5:1 leading to significant network planning issues. Since imports tend to be lighter than exports, the container imbalance is even higher.

U.S Air Trade Imbalance

US International Air Trade Imbalance

1.5

1.0

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Air

Ca

rgo

An

nu

al P

ou

nd

s (

in M

illio

ns

)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Tra

de

Imb

ala

nc

e R

ati

o

Total US Air Exp

Total US Air Imp

Trade Imbalance Ratio

Trade Imbalance Ratio (TIR) = Air Import/Air Exports

Imports

Exports

TIR

Air Trade Imbalance

Data Source: Commerce Department

The air trade imbalance ratio in CY 2004 for Asia was 1.8, Europe was 1.3, and South America was 1.9 In last two years the trade imbalance declined on US-EU lane In 2004 the trade imbalance increased on US-Asia lane

Air Trade Imbalance: U.S. International Lanes

US International Air Trade Imbalance on Various US International Lanes

1.1

1.8

1.3

1.0

1.3

1.9

0.00

0.50

1.00

1.50

2.00

2.50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Tra

de

Imb

ala

nc

e R

ati

o

Transpacific

Transatlantic

South America

Europe

Asia

South America

Data Source: Commerce Department

Data Source: Department of Commerce

Countries Contributing to U.S. Air Trade Imbalance

Air Trade Deficit in Weight Terms: CY 2004

Germany7%

Colombia5%

Malaysia3%

Peru3% Chile

5%

Italy6%

Others40%

China31%

• China significantly contributes to U.S. international air trade imbalance

The trade imbalance/deficit is primarily driven by several macro economic factors:

Economic activity (GDP) in US & other regions(US Economy spends more than it produces)

Interest rates between countries

Exchange rates

Business outsourcing Oil prices

Factors Causing Trade Deficit

The weakening of US dollar improved the US exports, primarily to Europe, thereby reducing the trade imbalance The US deficit with China was up 30.5% from last year and was the largest imbalance recorded with a single country

Pegging of Chinese Yuan to US dollar may have contributed to trade woes

The gap has been increasing due to increase in oil prices. However, in Dec'04 the gap narrowed due to slide in oil import prices

Regional Factors Impacting Lane Imbalance

Air Networks are getting constrained in one direction

Air cargo carriers have no trouble in filling their U.S. inbound flights with high-value cargo like electronics and consumer goods.

US outbound flights achieve lower yields and load factors, offsetting some of the profitability of the return flights.

Cannot introduce additional capacity on round trip basis since the flights are not profitable

Trade Imbalance Issues for Air Cargo Carriers

Introduce round the world flights to maintain the optimum load factors.

• In March'05, FedEx launched new westbound around-the- world flight• This is the express cargo industry's first direct connection between mainland China and Europe

Improve cargo densities on the constrained legs

Yield management based on network capacity optimization

Coping Strategies of Air Cargo Carriers

Develop partnerships in US to boost exports • The Commerce Department’s U.S. Commercial Service (USCS) has partnered with FedEx to provide ongoing support to Commercial Service efforts aimed at boosting exports from U.S. small and medium-size businesses.

• FedEx will inform its customers about the benefits of the USCS worldwide export assistance network of 108 domestic offices and 149 posts in 78 countries that provide export assistance

Coping Strategies of Air Cargo Carriers

Integrators are expanding their product portfolio and providing supply chain management & value added services

Develop other modal options like ocean, road, and rail, etc.

Coping Strategies of Air Cargo Carriers

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Questions

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