Supply chains are expanding into every nook of the globe at a time when trade imbalances threaten capacity. And, this is happening as heavy asset-based air freight carriers and steamship lines scramble to strategically place their equipment in areas where it’s most effective for their customers—and for their bottom line. In short, the global air freight supply world of 2007 is a wicked arena in which to produce profits on a worldwide scale. Let’s take a mode-by-mode look at that world.

No question there is enormous growth in air cargo. International air express shipping grew by 9.5 percent last year, according to figures compiled by Air Cargo Management Group (ACMG). The number of daily international express shipments hit a record 2.27 million for the first half of last year. That is more than four-fold growth since 1992, according to ACMG. Those optimistic reports are confirmed by the individual service providers. “We are definitely targeted for growth this year,” says Susan Rosenberg of UPS’s supply chain unit. “The fact we have our own assets for heavyweight air freight helps, but we have longstanding carrier relations. You’ve seen more capacity come in with aircraft orders.”

UPS is planning to add that capacity soon: This year UPS is receiving 10 MD11 and introducing three 747-400s to it fleet. And it has an additional 10 A380s on order.

While outbound from the Far East is still king in terms of airfreight volume, westbound traffic is becoming more active. Rosenberg describes the situation at UPS: “We have a good amount of outbound to the Far East, some finished goods and heavy machinery. Some auto parts are leaving the U.S. for elsewhere. We have government freight that is supplementing some movements out of the U.S. It’s still the case that we concentrate a lot more on high-tech, consumer electronics and retail that require quick turns and other goods with rapid obsolescence.”

As the volume increases, so do the customer demands. “It’s an interesting business,” reports J.R. “Reg” Kenney, DHL Global Forwarding senior vice president of marketing and sales in North America. “Certainly many large importers and shippers are looking for the size and scale companies like ours can provide. But they still want us to provide customized, personalized service. They’re not prepared to accept compromises on service levels.”

DHL Global Forwarding operates in 110 countries and has its hand in tens of thousands of shippers’ global supply chains. It can hardly keep up with demand, even after having bought the British 3PL Exel last year on top of its recent 49 percent stake in Polar Air Cargo. All this merger-and-acquisition activity is designed to help assure DHL of sufficient capacity in the worldwide chase for cargo space.

Customers also want leadership out of their service providers. John Beckett, vice president of operations for Menlo Worldwide, which operates in 20 countries, explains that as supply chains lengthen so too do risks. “The demands of a global shipper are such that they want their 3PLs to be leaders,” Beckett said.

International cargo across the Asia Pacific region will be the world leader in global freight with an annual growth rate of 6 percent this year, predicts the International Air Transport Association (IATA). Asian airlines are forecast to make $1.2 billion in total profit this year—down from an estimated $1.7 billion in 2006. IATA predicts that more capacity, competition, and new entrants could keep pricing down for 2007.

According to IATA, seven of the top 10 freight markets will fall within the Asia Pacific region. Not surprisingly, China’s annual freight growth rate leads the pack with an aggregate annual projected growth rate of 11.6 percent from 2006 to 2010. That is followed by Pakistan at 8.8 percent, Korea at 8.2 percent, India at 8 percent, Sri Lanka at 7.4 percent, Thailand at 6.3 percent, and Indonesia at 5.8 percent.

According to MergeGlobal, an Arlington, Va.-based consulting firm, all Asian markets will enjoy steady growth rates between now and 2010. The main driver will be growth in demand from Japan, Europe, and North America. Continued outsourcing of industrial and electronic goods will be a main driver for growth in Asian trade. Asia is also moving into heavy equipment manufacturing, which could be the fastest-growing commodity imported from the market over the next few years.

China’s Gross Domestic Product (GDP) is expected to post its third consecutive year of double-digit growth after growing by 10.5 percent in 2006 and 10.2 percent in 2005. Vietnam, which gains entrance into the World Trade Organization (WTO) this year, is a sound dark-horse candidate for growth in manufacturing. The country is being strongly urged to move away from pirating Hollywood movies and computer software, and may shift its resources toward manufacturing and consumer goods, further hastening the need for expanded transportation services to and from that country. Vietnam Airlines recently took delivery of the first of 10 new Airbus A321 passenger jets that arrived at Noi Bai International Airport. Vietnam, which achieved normal trade relations with the United States last year, will continue to emerge on the world airline and business stage after posting 8 percent growth last year.

The Middle East, carrier and shipper executives say, is another geographic center of air freight activity. “The Middle East is booming for us,” said DHL’s Kenney. “Anything related to oil and gas exploration and production is booming. That’s been a big growth area for us and that will continue.”

Kenney said one current challenge is meeting Latin American demand. “During the last half of last year, that was exceptional in terms of demand,” he said. Just like the oversupply of freight coming from China, there is a huge imbalance in southbound demand to Latin America. But northbound, freighters are often flying near empty, he said.

There is “continued strong pressure on rate reductions” as a result of shipping using on-line e-auctions, said Kenney. But he added that once shippers obtain initial rate reductions through these auctions, the savings are often hard to replicate later. “They still expect to get these large decreases, and that is putting pressure on service providers,” Kenney said.

There is very little room for reductions right now, particularly with high cost of fuel, labor, and increasing costs related to security, he said.

Others said new capacity has put pressure on rates. “There is more capacity than freight demand,” Menlo’s Beckett said. “Rates are dropping across the board, on everything. There is excess capacity and rates going down.”

High fuel costs are prompting a growing number of shippers to consider ocean instead of air transport—putting further pressure on air freight rates.

Neil Dekker of London-based Drewry Shipping Consultants predicts stability for this year. “We do not believe 2007 will be a bad year for freight rates and the worst of the downturn has already happened in our opinion,” Dekker said. “It is dangerous to talk of rate meltdowns as this is definitely not a true reflection of the market which is actually quite complex at the moment.”

Jack Yen, President of Evergreen Marine Corporation (Taiwan) Ltd. said China’s export volume is expected to remain strong as the economic recovery in the United States picks up steam this year. The cargo growth is predicted to be closely in line with the gradual increase of tonnage supply. Therefore, Yen said he was “cautiously optimistic” about the market development in the future.

From the Far East to and from Europe and the Mediterranean, Yen said traffic was “in line with the substantial growth expected from China and India,” and Evergreen has made appropriate adjustments to the space allocation to reap the highest profits from these booming markets. Although there will be no new tonnage introduced in the Trans-Atlantic market, the capacity increase is forecast to be in line with the cargo growth.

In the Asia to South Africa and East Coast of South America (ECSA) lanes, Evergreen has made moves in light of the vigorous trade expansion between China and these two areas. The ECSA service was expanded with direct calls added at Shanghai, Ningbo, and Yantian since last year, Yen said.

Drewry’s Dekker emphasized that one cannot ignore that every trade route works differently. However, the carriers have to be a little more creative in their approach to rate negotiations, and the way they deal with bunker surcharges will be of crucial importance this year since all in rates have not captured any increases in bunker costs that reached peaked last summer.

New capacity was added last year to transatlantic westbound lanes and that resulted in a signficant drop in average freight rates on those lanes, Dekker said. Far East to Europe freight rates are making a recovery and recent FEFC rate restorations appear to have been fairly successful, he said. The transpacific market is an unknown quantity as new contracts will be negotiated around April and May. Approximately 90 percent of eastbound transpacific freight moves are under annual contracts. There is only a small spot market, so if bunkers are locked in for example with no ability to change, the carrier can lose out. This year, carriers are going for big increases on intermodal business via the U.S. West Coast to allow for the 30 percent or higher increases in rail rates.

According to last December’s Drewry Container Market Quarterly Report, the weighted average freight rate of the main east/west trades is projected to have decreased by 5.6 percent last year to $1,407 per TEU. Drewry projects that the average industry freight rate across all trade lanes was approximately $1,467 last year—down 6.5 percent year-over-year. Drewry estimates that east/west freight rates will fall further by an average of 1.6 percent this year, but the marketplace has already experienced the worst of the freight rate decline.

The industry has recently adjusted supply in the core east/west trades with tonnage taken out and services revised. This should bring about a better equilibrium for supply/demand and a better environment for carriers to try and increase freight rates this year, industry officials said. “We see strengthening market conditions in major lanes for 2007,” said Mike Zampa, director of corporate communications for APL. “As a result, most excess capacity should be absorbed. Supply and demand should be more in balance than they were in 2006. With double-digit world trade growth expected to continue, the outlook for carriers is improved.”

For shippers who rely on the airfrieght companies, 3PLs, and ocean carriers to move their freight, 2007 promises to be a challenging year in some parts of the world. But, there are a couple of proactive steps that they can take to help assure the needed capacity and minimize the risk of supply chain disruption. One is to forge closer relationships with their service providers—the better the relationship, the faster any hurdles can be overcome. Another key step is to improve resiliancy. Identifying potential sourcing and transportation alterivativs ahead of time is an effective way of coping with supply chain disruptions when they occur.

As markets boom and carrier services expand all over the globe, shippers need to make sure that they are the beneficiaries—not the victims—of these boom times.