The logistics of air cargo co-mingling at Ted Stevens Anchorage International Airport

Journal of Air Transport Management 8 (2002) 109–114

The logistics of air cargo co-mingling at Ted Stevens Anchorage International Airport Darren Prokop* Business Administration-Transportation-Logistics, College of Business and Public Policy, University of Alaska Anchorage, 3211 Providence Drive, Anchorage, Alaska 99508-8244, USA

Abstract This paper discusses the current efforts to bring further deregulation to international air cargo operations. This is done in the context of a special set of operations, known as co-mingling, which is allowed at Ted Stevens Anchorage International Airport. Comingling involves air cargo being transferred to another airplane that may or may not be in the initiating carrier’s fleet. After the transfer is completed the cargo proceeds based on the second plane’s pre-determined routing. This paper sets co-mingling in context with co-terminalization and cabotage operations by outlining the limitations of what the United States Department of Transportation actually mandated. While the operations are unique to the State of Alaska they do set a precedent for unilateral reform of international air cargo operations on the part of the US government. An economic appraisal of co-mingling operations is provided and is shown to be a source of efficiency gains for the US air cargo market. r 2002 Elsevier Science Ltd. All rights reserved. Keywords: Air cargo co-mingling; Co-terminalization; Cabotage

1. Introduction The strategic importance of Anchorage, Alaska to air cargo transportation has been duly recognized by the US Department of Transportation (USDOT). At the behest of Ted Stevens Anchorage International Airport (hereafter ANC), USDOT granted it, along with Fairbanks International Airport (FAI), expanded air cargo transfer flexibility in 1996 in the form of co-mingling. Co-mingling involves air cargo being transferred to another airplane that may or may not be in the initiating carrier’s fleet. After the transfer is completed the cargo proceeds based on the second plane’s pre-determined routing. This was a unique development that has not been matched by any other airport elsewhere in the United States. In effect, it is the foreign cargo carriers themselves which stop and refuel at ANC that have gained the most from this new flexibility. In other words, unilateral air cargo regulatory reform for the sake of international air cargo operations now has a precedent. ANC currently possesses a geographic advantage in air cargo routing that will be challenged in the years to *Tel.: +1-907-786-1992; fax: +1-907-786-4115. E-mail address: [email protected] (D. Prokop).

come as larger airplanes (e.g., Airbus Industrie’s A380 and Boeing’s next-generation, 747-400 freighter) are able to over-fly ANC without the need for refueling. Furthermore, experiments with polar routes imply that international air carriers serving Asia, Europe, and North America need not include ANC at all within their flight paths. To counter these prospects, ANC has been working to enhance its position by providing an operational advantage for international air cargo carriers. This paper overviews the path ANC took to spearhead the co-mingling initiative, and discuss what was and what was not granted by USDOT. Suffice it to say at this point that USDOT was careful to craft the requirements such that no new US routes would be created for the foreign carriers beyond those allowed within the relevant and pre-existing bilateral air agreements. As a unique step in the air cargo reform process, however, the co-mingling initiative will be set against further discussions concerning the issue of air cargo coterminalization (co-T) in particular, as well as cabotage reform. While co-T and cabotage seem to be distant hopes within the bilateral air agreements covering the US’s trade partners, it is the case that ANC offers the first careful step in the right direction. An economic appraisal will be provided.

0969-6997/02/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved. PII: S 0 9 6 9 - 6 9 9 7 ( 0 1 ) 0 0 0 3 5 - 7

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2. Ted Stevens Anchorage International Airport (ANC): an overview

Table 1 Airline and tenant rates and fees for fiscal year 2000a Landing fees

ANC is roughly a 5000 acre complex with three major runways, two major terminals, four cargo airparks and an air cargo refueling ramp. The area designated for transient air cargo parking measures about 2 million ft2. Approximately 228,000 flight operations occur per year with approximately 230–260 revenue landings occurring per dayFabout 40% of these being all-air-cargo. ANC operates 24 h daily with no curfews; and approaches/ departures normally occur over water (Knik Arm) which, along with a preferential runway policy, aids in noise abatement. ANC’s strategic location is exemplified by the fact that it is within 9 h of flying time to about 95% of the world’s industrialized nations. In terms of distances ANC is within a roughly 2000–4000 mile radius of the world’s major air cargo centers as shown in Fig. 1. ANC is owned and operated by the State of Alaska and is self-supporting through rates and fees assessed to airlines and other tenants (see Table 1). Through fiveyear operating and terminal lease agreements, the airlines guarantee revenue to cover ANC’s operating expenses. For fiscal year 1999, these revenues totaled $52.2 million. By international standards, ANC has a relatively low landing fee. Given the $0.58/1000 lbs landing fee for the 2002 fiscal year, a standard Boeing 747-200 weighing about 830,000 lbs would be assessed a landing fee of $481.40. This is in comparison to an average signatory-carrier, landing fee of $1281 for such aircraft calculated across all medium-sized, US hubairports (which includes ANC). ANC hosts, or is situated near to, 10 freight forwarder companies. It is within 2 miles of the nearest rail terminal and intermodal center; and within 3 miles of the nearest motor carrier terminal, inland waterway port and interstate highway. A foreign trade zone is located at ANC. Adjacent to ANC is the Anchorage Mail

Fuel flowage fee Parking fee

Terminal building rental North terminal docking fee Federal inspection fee Shared use ticket counter Crew processing ticket counter North terminal VIP lounge

$500 per docking. $25.89 per inspection. $55 per 3 h use for 4 positions; $110 per 3 h use for more than 4 positions. $10 per 30 min use for one position. $50 per use for up to 4 h; $100 per use exceeding 4 h.

a

Source: Ted Stevens Anchorage International Airport. A signatory airline has signed both a 5-year operating agreement and terminal lease agreement. b

Processing Center (which processes an average of 1.2 million pieces of mail per day). It is powered by a $5.5 million fuel cell system (the US’s largest commercial fuel cell system).1 As the largest airport in Alaska, ANC is ranked 5th in the world in terms of loaded, unloaded and in-transit cargo weight (i.e., put-on, pulled-off, and stayed-on). The amount was 1.9 million metric tons in 2000. Memphis International Airport (MEM), with 2.5 million, is first in this category due, in part, to it being the main hub for Federal Express. However, ANC is ranked 1st in the world for landed cargo weight (i.e., pulled-off and stayed-on). Between 1993 and 98, the amount of landed air cargo weight grew by 58% at ANC and 62% at MEM. Both Federal Express and United Parcel Service maintain international sorting hubs at ANC’s North Cargo Airpark while Northwest Air Cargo and Polar Air Cargo maintain transfer hubs. ANC is also ranked 1st in the world in terms of fueling of all-cargo aircraft. Fuel consumption at ANC in 1998 was approximately 648 million gallons. The West Cargo Airpark is the site of a 12 million gallon fuel farm. A list of the airlines serving ANC is provided in Table 2. Out of the 17 all-cargo, international carriers serving ANC, their average weekly landings in 2000 was dominated by Federal Express, Korean Air, United 1

Fig. 1. The strategic location of Anchorage (distances are in miles).

$0.89 per 1000 lbs of certified maximum gross take-off weight $0.023 per gallon for non-signatory airlines. $0.02 per gallon for signatory airlinesb. $0.15 per 1000 lbs of certified maximum gross take-off weight per day. First 3 h is exempt for non-signatory airlines; 12 h for signatory airlines. $37.40 per square foot per year.

A fuel cell converts hydrogen, via natural gas and air, into electricity. No combustion is involved. Rather than being burned the natural gas is subject to a chemical process. The by-product is hot water (which is used to enhance the heating process) and carbon dioxide.

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D. Prokop / Journal of Air Transport Management 8 (2002) 109–114 Table 2 Passenger and air cargo carriers serving ANCa Domestic carriers

International carriers

Passenger operations Alaska Airlines American Airlines America West Continental Airlines Delta Air Lines Era Aviation Frontier Flying Service FS Air Grant Aviation Northwest Airlines Peninsula Airways Trans-World Airlines United Airlines

Passenger operations Asiana Airlinesb Cathay Pacific Airwaysb China Airlines EVA Airwaysb Korean Air Mavial/Magadan Northwest Airlines

Passenger charters American Trans Air Hawaiian Airlines Northwestern Arctic Air Omni Air International All-cargo operations Airborne Express Air Cargo Express Alaska Airlines Alaska Central Express Empire Airlines Era Aviation FS Air Greatland Air Cargo Lynden Air Cargo Northern Air Cargo

All-cargo operations (continued) Korean Air Nippon Cargo Airlines Northwest Air Cargo Polar Air Cargo Singapore Cargo Airlines United Parcel Service

Passenger charters All Nippon Airways Balair Canada 3000 Canadian International Condor Flugdienst Japan Airlines LTU International Airways

All-cargo charters Emery Worldwide Airlines Gemini Air Cargo Malaysia Airlines World Air

All-cargo operations Air China Asiana Airlines Atlas Airc Cathay Pacific Airways China Airlines China Cargo Airlines EVA Airways Evergreen International Airlines Federal Express Japan Airlinesd KLM-Royal Dutch Airlines

a

Source: Ted Stevens Anchorage International Airport and OAG Cargo Guide Worldwide. (Aug. 2001). In-transit only. c Also provides joint operation through ANC for China Southern Airlines. d Also provides joint operation through ANC for Air France and Alitalia. b

Parcel Service and Northwest Air Cargo. A breakdown of these is provided in Table 3. USDOT granted 10 new China–US, weekly service routes on November 21, 2000. Service began on April 1, 2001. United Parcel ServiceFa new entrant to this marketFreceived 6 of these. Among the three incumbents: Northwest Air Cargo received 1; United Airlines received 2; and Federal Express received 1. Of these 10 new weekly routings 8 will be using ANC as an intermediate stopping point.2 On the passenger side of airport operations ANC, and Fairbanks International Airport (FAI),3 were granted 2 Bidders that were not successful were: American Airlines, Delta Air Lines and Polar Air Cargo. 3 Both airports are under the auspices of the Alaska International Airport System (AIAS) which consolidates their accounts for fiscal reporting and manages both as a self-sufficient enterprise fund. Fairbanks is located in Central-Alaska and is 263 airline statute miles northeast of Anchorage. Air France, Lufthansa Cargo and Cargolux of Luxembourg are the airport’s core group of foreign air cargo carriers.

Table 3 Average weekly landings by All-cargo, International carriersa Carrier

Fiscal year 2000

Air China Asiana Airlines Cathay Pacific Airways

4 21 14

China Airlines EVA Airways Evergreen International Airlines

37 30 13

Federal Express Japan Airlines Korean Air

82 41 60

Nippon Cargo Airlines Northwest Air Cargo Polar Air Cargo

37 46 6

United Parcel Service Others

53 52

a

Source: Ted Stevens Anchorage International Airport.

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passenger stop-over authority for various foreign air carriers in 1981 (see: USDOT 1996, Order 96-11-2). Basically, a foreign carrier may drop-off passengers in Alaska and then proceed to the contiguous United States with any remaining passengers. This rather limited form of co-T has recently been expanded to air cargo as will be discussed in the next section.

3. Innovative air cargo logistics at ANC: the co-mingling option Double-digit growth in air cargo activity has been the case at ANC for several years now. Since the City of Anchorage and the State of Alaska represent a small market in terms of origin–destination, ANC has an incentive to enhance its relationship with international air cargo carriers and work to achieve efficiency gains through regulatory reform with respect to air cargo operations. Apart from ANC’s strategic position as a major refueling stop, it is in a position to pin-point areas where regulatory restrictions could be relaxed. ANC recently established success in this area by way of persuading USDOT to agree to use: y Alaska as a testing ground for even greater liberalization of foreign and domestic air carriers’ rights to carry international air cargo on route legs between Alaska and other United States points. Such liberalization would optimize the geographic advantage of Alaska for air cargo transfer. In addition, such steps would also optimize the flexibility that [USDOT] has sought for Alaska as an international aviation hub. Without vigorous initiative on the part of [USDOT], the United States stands to lose to foreign airports the economic activity for labor, industry, and consumers that increased domestic and foreign transfer authority could generate for the United States.4 Two threats to ANC’s geographic advantage are taking shape in the form of: (1) larger freighter planes with ranges capable of over-flying ANC; and (2) polar flights that would avoid ANC all together. Of course the move to polar routes trades-off payload for the extra fuel necessary to achieve time-savings.5 The first super4 United States Department of Transportation. (2000). Office of Aviation and International Affairs. HR 4475. p. 64. 5 NAV Canada (Canada’s non-profit, private sector air traffic control corporation) and the Federal Aviation Authority of Russia (FAAR) will invest $55 million over the next 5 years on navigation and communication upgrades over the several polar routes they have experimented with. Their joint study estimated a typical time saving of about 2 h on North America–Asia routes that, needless to say, avoid ANC.

jumboFAirbus Industrie’s A380Fshould be available by March, 2006 and Singapore Airlines will be the first recipient. As to the freighter version, Federal Express has ordered 10 and Dubai-based Emirates Airlines has ordered 2.6 In a pro-active step in the face of these threats ANC, representing the interests of the State of Alaska, approached USDOT on the matter of air cargo comingling in 1995 and took the lead in the negotiation process. On November 1, 1996, USDOT granted both ANC and FAI the unique option of allowing a foreign air cargo carrier the right to move its cargo on ramp to either: (1) US-based air cargo carrier (i.e., international trade in services); (2) different plane or set of planes operated by that foreign carrier (i.e., weak co-T);7 or (3) different foreign carrier to move the air cargo to a 3rd country (de facto 5th or 7th freedom movement of cargo with the United States as the intermediate point).8 Of course, points (1) and (2) can, in fact, necessitate the co-mingling of international freight and landed imports with domestic freight. Note that the US Customs Service no longer makes a clear distinction between international freight (with a destination in a 3rd country) and landed imports (to be further moved point-to-point within the United States to their final 6

To give some idea of the extra size involved, the A380 freighter will be capable of handling up to 71 pallets of cargo compared to 39 for the Boeing 747-400 freighter. 7 Co-Terminalization (co-T) indicates the ability of a scheduled foreign carrier to proceed, with some or all of its foreign cargo, from the (air)port-of-entry to at least one more domestic airport. Weak co-T does not add to the foreign carrier’s US network beyond the right to co-mingle cargo at ANC/FAI. Strong co-T would, in fact, expand the foreign carrier’s US network. 8 The governing section of the US Code is: Title 49, USC, Chap. 413, Sec. 41301, ‘‘Requirement for a Permit’’. Essentially, USDOT granted foreign air cargo carriers an exemption under this section for expanded cargo transfer flexibility. At the time, however, foreign carriers of both the United Kingdom and Japan were not granted an exemption. This was due to on-going negotiations concerning their overall bilateral air agreements with the United States (USDOT, 1996, Order 96-11-2). USDOT felt that the granting, in effect, of extra-bilateral authority at the time of discussing the current bilateral would be improper. As of February, 1998, Japan is eligible to co-mingle while the United Kingdom is still not. And beyond ANC and FAI, Honolulu International Airport (HNL) was granted similar authority in 1999. As yet, no air cargo carrier stopping in Hawaii has made use of the comingling reform. However, on August 10, 2001 Canada 3000 Airlines petitioned USDOT to co-mingle at HNL on routes involving Canada–Australia/New Zealand and Cook Islands. The case is pending. Finally, USDOT is also willing to discuss expanding authority to other geographically isolated parts of the United States; specifically, Guam and Saipan which are located between New Guinea and Japan. For a review of the 8 ‘‘Freedoms of the Skies’’ see Button and Stough (2000).

D. Prokop / Journal of Air Transport Management 8 (2002) 109–114

destination). Until the imports reach their final destination as specified on the bill of lading, the imports are still considered ‘‘international’’ at their port of entry (Prokop and Dean, 1999). In any case, the new authority for air cargo has been granted for 2-year intervals subject to renewal; however, USDOT reserves the right to amend, modify, or revoke this exemption authority, without hearing, in response to any perceived need to respond quickly in the public interest. It is also important to note that all city-pairs as specified within any current bilateral air agreement must be respected. This, in combination with the prohibition against cabotage, means that no new air cargo routes were sanctioned by USDOT as a result of the exemption. Fig. 2 sets co-mingling in the context of other deregulatory processes. Options 1–4 in Fig. 2 indicate progressively more restrictive foreign air cargo carrier operations. Option 4 indicates a simple interlining operation with the foreign carrier co-mingling its cargo with a domestic carrier. As such, the efficiency of this trade in service is dependent upon the extent of the domestic air carrier’s network in the contiguous US. Option 3 simply allows for comingling within the foreign air carrier’s fleet. The efficiency of this weak form of co-T is dependent upon the extent of the foreign air carrier’s network in the contiguous US. Options 1 and 2 are the two most liberal forms of foreign air cargo operations and are currently being pursued by ANC with USDOT. These are options in theory and not practice (hence the dotted lines in Fig. 2). Option 2 could be described as strong co-T because the foreign carrier would be allowed to proceed to any destination in the contiguous US presuming, of course, that the applicable landing slots were secured. In other words, new routesFand, therefore, competition for domestic air carriersFwould be developed. Option 1 is essentially operation 2 plus the ability to carry domestic cargo to, and among, points in the contiguous US. Basically, option 1 describes cabotage.

Fig. 2. Co-mingling and deregulation in context.

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Between 1996 and 98, ANC did not properly account for any co-mingling cargo transfers. For example, a 100 lb shipment moved from one plane to another would have remained listed as cargo ‘‘in-transit’’. The practice since 1998 has been to report the transfer as both deplaned and enplaned international freight. Even if the cargo is enplaned to a domestic carrier for delivery to the United States the freight will be listed as international. Of course, this form of accounting jibes nicely with the view taken by the US Customs Service as outlined earlier. Currently, all foreign-based cargo carriers using ANC have welcomed the co-mingling reform. However, those carriers that indicate activity in this regard (i.e., China Airlines, Japan Airlines and Nippon Cargo Airlines) use it sporadically at this time. Note, again, that Japan has only recently been granted the opportunity since the re-negotiation of the US–Japan bilateral air agreement was completed.9 Taiwan-based EVA Airways, for example, sorts its cargo elsewhere meaning that there is no need for air cargo transfer at ANC since all cargo is proceeding to a common destination in the contiguous United States. Others, as well, simply ‘‘gas-and-go’’.

4. Economic analysis Allowing foreign and domestic carriers to compete on a level playing field on US soil would be a necessary though not sufficient condition for efficiency. Open access covers operations but subsidization, for example, may mean that carriers’ access to capital will keep the field tilted. In terms of operations, however, unrestricted point-to-point domestic haulage by foreign carriers (i.e., cabotage) provides for the greatest degree of routing and carriage competition.10 A step toward cabotage in the air cargo industryFand a necessary conditionFis the ability of scheduled foreign aircraft to co-terminalize. Currently, the United States does not allow any form of air cargo co-T among its airbilateral partners save for the weak form of co-T allowed through ANC/FAI.11 Now a step toward air-cargo co-T among foreign carriers using ANC has been taken by USDOT in the form of the co-mingling option. Since ANC is a refueling stop it is only natural for it to become 9 In fact, Japan Airlines co-mingled air cargo with a domestic carrier for the first time in September, 2000. One disincentive against further activity in this regard is that the refueling layover of their planes tends to range from 15 min to 1 h thus providing little time for air cargo transfers. 10 For a discussion of the efficiency gains resulting from cabotage reformFspecifically the effects on fronthaul and backhaul freight ratesFsee Prokop (1998). 11 Technically, though, the 1995 Canada–US Open Skies Agreement allows for co-T among their respective air carriers; however, the takeoff weight of the aircraft cannot exceed 35,000 lbs. For an overview, see Shurvell and Crockatt (2000).

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an interlining point as well. While the previous discussion has shown that co-mingling has not been a significant activity at ANC as yet, it is well known that interlining is a source of fleet economies. Furthermore, any interlining or trans-shipment point may also precipitate spill-overs such as: expansion of cargo warehouse space; and increased customs clearance activity for cargo interlining between a foreign and domestic carrier. Of course, another spill-over would be the creation of new routes for foreign carriers through ANC. Recall, however, that USDOT required that no new routes be created under the reform which, thus, mitigated such an effect. While the air cargo reform was measured in its construction, it has the effect of being a positive-sum game. The State of Alaska is viewed as a frontier by USDOT meaning that it is an area ripe for experimentation because of its dependency on foreign air cargo activity. Of course, the prohibition against new foreign carrier routes does protect US labor to some extent. Co-mingling, to the extent that it occurs, at least adds to efficiency along existing routes. And interlining has the ability to benefit domestic carriers using ANC to the extent that they have excess capacity to offer the foreign carriers.12

has been particularly slow to adjust in an international context. Governments negotiate bilateral air agreements, not the carriers themselves. In that regard it is unique to see unilateral reform take place. While USDOT regards the State of Alaska as a frontier, there is no economic rationale to suggest that co-mingling not be pursued at other airports under jurisdiction by USDOT. Of course, increased foreign carrier presence at other US airports is likely to be something that USDOT would not find to be all that easy to achieve politically. ANC is a special political case. Nonetheless, if a particular airport wished to see co-mingling occur at its facility in order to realize spill-overs, it would be a useful first step along the way to introducing unrestricted co-T to the US air cargo network.

Acknowledgements I am grateful to Linda Close, Marketing Manager, Ted Stevens Anchorage International Airport, and two anonymous referees for their helpful comments and suggestions.

5. Conclusions References ANC has undertaken a successful first step in offering an operational advantage to international air carriers as a supplement to its well-established geographical advantage. Of course, any success in terms of efficiency gains in air cargo operations rests with the air carriers themselves. ANC has been pro-active in the sense that it does not wish to wait and see if polar routing becomes popular with air cargo carriers in the years to come. Nor does ANC wish to become an emergency stop for fleets of airplanes merely over-flying. An airport has little control over its geography but it does play a role in what can be done on its runways. Transportation deregulation is a careful process resulting from conflicting political interests. While government oversight may be adjusted with the stroke of a pen, transportation modes themselves may be slow to adjust to the new environment. The air carrier mode

12

In particular, Evergreen International Airlines, Gemini Air Cargo and Tower Air provided positive testimony to USDOT regarding increased interlining options (USDOT 1996, Order 96-11-2).

Button, K., Stough, R., 2000. Air Transport Networks: Theory and Policy Implications. Edward Elgar, Northampton, MA. OAG Cargo Guide Worldwide. 2001. OAG Worldwide, Oak Brook, Il. Prokop, D., 1998. The Canada–US transborder trucking industry: regulation, competitiveness and cabotage issues. Doctoral Dissertation, The University of Manitoba, Winnipeg, MB. Prokop, D., Dean, J., 1999. The goods and services tax and the US federal excise tax: barriers to trucking cabotage reform in Canada. Canadian Tax Journal, Toronto, ON. 47 (5), 1180–1193. Shurvell, S., Crockatt, M., 2000. Open skies for passengers, but what about cargo? Re-evaluating Canada–US air cargo regulations. Canadian Transportation Research Forum: Proceedings, Saskatoon, SK. 35, 599–615. United States Department of Transportation, 1996. Order 96-11-2. In the Matter of: Expanded Cargo Transfer Flexibility at Alaska International Airports. Final Order. Washington, DC. United States Department of Transportation. 2000. Office of Aviation and International Affairs. HR 4475. Washington, DC.