Freight business fortune dependent on buildup play-out
By Stephanie Lundberg

“It depends,” says Eric Bell, regional vice president of Triple B Forwarders, when asked what he thinks is in store for the freight business during the several years. And he’s not alone; all of the experts Guam Business spoke to at Guam’s freight forwarding, shipping, and moving and storage companies have a similar response to that question.

That’s because freight-related organizations on Guam and in the Mariana Islands operate in a unique situation with complicated elements — import-heavy trade, a struggling economy, ever-evolving security requirements and a not-yet-defined military buildup.
Subsequently, predicting future trends in the freight sector requires a nuanced approach, with an understanding of how the freight sector currently stands.
Guam’s air cargo exports have taken a serious hit in the last several years. In 2009 Guam exported only 9,000 metric tons of goods, a 47.9% decline from the 17,000 metric tons seen in 2001. This is primarily due to the fact that Guam’s major exports are tuna and other native fish, which have seen marked declines in overall population and catch size. Military hold-baggage, household goods and machine parts – what currently make up the majority of outgoing air cargo – must now take up the slack.
Guam’s reliance on imports has helped keep the freight sector even – overall air cargo activity has remained steady at around 16,600 metric tons per year. So although Guam saw only a relatively small 6% decline in overall air cargo operations in 2009 (compared to a 13% decline nationwide), it’s still showing signs of stress.
“The economy has definitely had a major impact,” says Mary C. Torres, acting executive manager for the A.B. Won Pat International Airport Authority Guam. “Guam’s tourism-driven economy and luxury-goods market are heavily reliant on just-in-time inventory, and air transportation plays a large role in the supply-chain process. If visitors aren’t buying products, retailers won’t restock their shelves.”
The poor economy of the last two years has caused similar problems for ocean-freight operations. The Port Authority of Guam recorded a decline in cargo operations of 5% in 2009 from the previous year, 94,073 containers from 99,908, respectively. And although PAG General Manager Enrique Agustin predicts that fiscal year 2010 will see an increase in cargo operations, he also believes it will be minimal. “[Increases in] current container volumes for 2010 are barely noticeable when compared to 2009 year end statistics: 95,450, less than 1%.”
The economy isn’t the only factor affecting the movement of freight in and out of Guam; rising fuel costs are also a major concern. “As airlines downsize their equipment to maximize load factors, operate more efficiently and increase yields, cargo payload is often sacrificed in this process,” says Torres. This means more passengers, more personal baggage, and less room for freight.
Adam Ferguson, Continental Airlines’ Asia-Pacific cargo sales director, agrees. He says that before 2006, the price of oil wasn’t a major factor affecting their operation costs. Since then, however, every rise in the per-barrel price of oil constitutes a huge expense to Continental — to the tune of $40 million annually for every $1 increase.
After fuel costs, increasing security requirements add yet another dimension to freight operations in a post-Sept.-11 world. “We’re living in a new kind of regulatory environment where we’re affected by security,” says Bell. “Security has become a larger and larger component of freight cost and the services that are required.”
For air freight, this includes the Transportation Security Administration’s requirement for 100% screening of cargo transported by passenger aircraft. While less isolated markets have better access to dedicated cargo flights, due to its isolation the majority of Guam’s air cargo is transported in the holds of passenger aircraft. Consequently, the TSA regulation will disproportionately affect air cargo coming into and out of Guam, and the cost associated with this regulation when it comes into effect in August will be considerable.
“The typical screening fees I’m hearing are 10 cents to 15 cents per kilo, whether through a third party or if it’s an [internal] job,” Bell says.
Although Bell is concerned with the additional financial burden of security requirements, he’s worried about possible delays in shipping cargo as well. Currently, shipping goods by air freight is more expensive than shipping by ocean, but it is also faster. If the new TSA regulations cause air freight costs to rise, while also causing delays in loading and shipping, the advantage to the consumer in sending their goods via air is reduced. If there’s no benefit to shipping goods by air, consumers may opt to rely on ocean freight.
Similarly, delays could result in problems for consumers who rely on just-in-time inventory to run their businesses. “As the [security] criteria get more and more stringent, it starts to prevent people from shipping via air,” says Bell. “If shipping a spare part suddenly takes two weeks instead of two days, what happens if you run out? It really changes the dynamic of the way people do business.”

New security requirements haven’t been limited to air cargo operators; ocean freight companies have had to adjust to new security reporting requirements that U.S. Customs and Border Protection introduced in January. “In a circumstance that is rather unique in shipping, for many different reasons, freight moving to Guam from the U.S. mainland to Hawaii is considered a domestic move, while freight moving from Guam to the U.S. mainland is considered an international move,” says Len Isotoff, general manager of Matson Navigation Co.
As a result, shippers out of Guam must comply with the Importer Security Filing and Additional Carrier Requirements, nicknamed the “10+2” program. The program, aimed at preventing smuggling and applying better security to cargo arriving in the U.S. via ocean vessel, requires shippers to file ten cargo data elements to CBP before their vessels can depart for the U.S., such as the seller, the buyer and the manufacturer of the goods. Before the ship arrives at the U.S. destination port, shippers must submit another two elements, the container stuffing location and the consolidator. Shippers that don’t comply face a number of consequences, ranging from a $5,000 fine for every violation to the seizure of the cargo in question.
The port authority has also had to make upgrades to its security process. In 2007, TSA and the U.S. Coast Guard began issuing a biometric identification credential called the Transportation Worker Identification Card required under the Maritime Transportation Security Act.
The TWIC program requires that any individual needing unfettered access to secure facilities or vessels at ports submit “biographic and biometric information such as fingerprints, sit for a digital photograph and successfully pass a security threat assessment conducted by TSA,” according to the TSA website.
Agustin acknowledges that the program might cause slight delays in practice, but he says it is necessary for the protection of the port. “This program was implemented at the Port Authority of Guam and a security threat assessment is conducted on all TWIC applicants,” he says. “Although this does create another level of security, it increases the ability of our federal and local authorities to protect our island’s only commercial seaport.”
Despite the challenges of the economy, fuel costs, and security, most industry professionals Guam Business spoke with remain optimistic about future trends. “The first quarter of the year seems very positive compared to last year at the same time,” says Danny Lim of CTSI Logistics. “We’re hitting our budget so far. We’re becoming more aggressive in penetrating the market, and that’s helping us to continue to grow despite the slow economy.”
“Our traffic has actually increased over the last couple of years as a result of seeing capacity in other industries [shrink],” says Ferguson of Continental. “While the economy has suffered over the last few years, we’re seeing some uptick in business, especially where it’s related to the military.”
As Ferguson notes, much of the optimism stems from the anticipated move of 8,000 Marines and their dependents to the island by 2014. Freight companies expect the demand from related construction projects to be a boon to their bottom line.
“We anticipate the inbound air-freight market segment to increase substantially with the upcoming military buildup,” says Frank Arriola, general manager of PacAir Properties. “Timely delivery of building materials and equipment will drive the demand for dedicated freighter service from the West Coast. The increase in population [associated with the buildup] will be a contributing factor to the projected growth in inbound air freight.” PacAir Properties built the Integrated Air Cargo Facility in cooperation with the airport authority and anticipates seeing new cargo tenants interested in the facility as a result of the heightened demand for goods.
Isotoff agrees with Arriola, and expects this effect to begin as early as this year. “With the current military buildup in Guam moving forward, the region’s freight sector, particularly commodities related to the construction industry, will improve later this year and continue to experience growth for several years,” he says.
“We’re seeing a lot of prospecting from companies looking to move here for the buildup. They’re looking into who to use, how much it will cost. We’re getting a lot more inquiries,” says Roy Adkerson, the general manager of Pacific Island Movers.
“The buildup will have a positive effect on our business as a whole. The overall relocation of military personnel, which represents a segment of our business, has been sluggish for the third year in a row but it appears to be on the upswing and we hope that trend continues,” says Corine S. Napoleon Berking, general manager of Dewitt Moving & Storage.
Gearing up for the buildup has its difficulties, however. Although the Marines’ move to Guam is currently set for 2014, it depends on a number of factors outside the freight sector’s control, including the release of a final Record of Decision on the buildup’s Environmental Impact Statement, which has already been pushed back several times. By federal law, construction may not begin until the ROD is released, which, at press time, is projected for September.
Freight companies are now addressing a unique problem: the need to increase cargo operation capacities in anticipation of the buildup in the long term, while still ensuring the success of current operations in the short term. “We’re trying to position ourselves — trying to throw as much at the infrastructure in anticipation of the buildup as we can, but at the same time put food on the table everyday,” says Bell.
Still, companies are taking steps to prepare. Bell explains Triple B’s focus on contingency planning: “Most of the planning has to do with scenarios — what are we going to do when we need to move twice as much freight through this facility? Well, we’ll probably start earlier, finish later, maybe run a night shift … there are contingencies to maximize our process.”
Pacific Island Movers, Dewitt Moving & Storage, and other moving companies will play a more individual role in bringing the new military personnel to the island — that of handling the personal belongings of the service members and their families. These companies are already laying the groundwork for expanded services and capabilities.
Pacific Island Movers has obtained land in Tiyan and has plans to build a new facility with up to 40,000 square feet of space for storing and moving the additional household goods and baggage.
Dewitt Moving & Storage, along with its sister company Approved Freight Forwarders, has been working on increasing its handling operations as well as its facilities. “For the past couple years we have been slowly building up our fleet of equipment to include tractors, chassis, flatbed trailers, truck-mounted forklifts in an effort to provide a wide range of services and equipment to support the impending buildup. Approved Freight Forwarders has also been improving our technology, equipment, and has recently moved our California terminal to a facility three times the size of our old location,” says Berking.
Continental Airlines Cargo is capitalizing on the increased demand for goods in the outlying islands as a result of the buildup. “We’re [starting a] a service that would be a very consistent bimonthly service into Pohnpei directly from Guam, which would enable folks in Pohnpei to purchase perishables and things that they need, rather than waiting for the next available ship to come through. They’d be able to order air freight and bring in fresh food, as well as anything related to the buildup as well,” says Ferguson.
Similarly, Matson is hoping to arrange its operations so that it can keep up with projects related to the Marines’ move, while ensuring that services unrelated to the buildup are minimally affected. According to Isotoff, “Matson has a special project team focused on the Guam military buildup … From an ocean transportation infrastructure perspective, Matson, along with Horizon Lines, invested in three gantry cranes for the port of Guam, improving the port’s ability to handle throughput of cargo.” The company is considering other steps to help ensure that construction-related cargo volumes not disrupt the flow of shipments to the rest of Guam’s customer community.”
It’s been widely acknowledged that the military buildup will require improvements to infrastructure on the public side as well. Specifically for the commercial freight business, these improvements will need to involve an increase in facility capacity and efficiency in cargo operations.
Among the projects intended for its capital improvements, the port authority is planning to install new terminal and gate operating systems. “The redevelopment of the port of Guam marine terminal will significantly improve the efficiency of the terminal,” says Agustin. “In fact, the project will create operating cost savings that range from $8 million to $20 million per year, returning the cost of the capital investments in just 10 years after project completion,” Additionally, the port estimates a 30.8% increase in jobs there — roughly 324, and mostly in freight-related positions — linked to overall improvements.
Of equal importance to the port’s efficiency — particularly during the increased operations tempo likely to result from the Marine relocation — are the three gantry cranes purchased jointly by Matson and Horizon Lines in 2008. The cranes have become a point of contention between the companies and the port authority; the port contends it has the right to use the cranes to service ships from other companies, while Matson and Horizon dispute that claim.
None of the organizations involved have released any new information on the status of an agreement regarding third-party use of the three gantry cranes; the port says that it is concerned about the issue but confident that it can serve the needs of its carriers, and Matson would say only that negotiations are ongoing. Horizon Lines’ spokesperson did not comment.
Despite the relative silence on the subject, the stakes are potentially high. Without more gantry cranes, the port may find itself unable to keep up with cargo demands associated with the buildup. In addition, the port is required by Guam law to either purchase or lease at least two gantry cranes by Dec. 31, 2012 as part of phase I of its modernization plan. Since the port is currently unable to use the three privately owned cranes for general operations, it will have to purchase the two mandated cranes on its own.
The Port’s ability to begin work on this and other projects depends on raising funds to pay for it — around $200 million. Despite a combination of federal grants, cost-saving measures, and recent tariff rate increases, the port authority is struggling to raise the money.
“It is clear that the Port’s current revenue trends are lower than planned,” says Agustin, “and currently the Public Utilities Commission has determined that the port may face a huge financial challenge to fund its modernization plan even with the approved interim 3.4% increase in port tariffs.”
A recent designation as one of 16 Strategic Commercial Seaports by the U.S. Army’s Military Surface Deployment and Distribution Command may help the port raise the funds. According to Agustin, there are many benefits to such a designation, including the possibility of more federal funds, a stronger partnership with the Department of Defense in developing projects of mutual need, and higher cargo movement related to military deployments.
“In addition, strategic designation showcases to the commercial industry our capacity to serve the needs of their companies and our entire community,” says Agustin.
The airport authority has also recognized the need for infrastructure improvements. “By 2014, we do anticipate an increase in outbound cargo, particularly household goods and hold baggage as military personnel and their dependents begin the rotations into and out of Guam,” says Torres. To address this increase, the airport authority has invested $500 million in projects like PacAir’s 160,000-square-foot Integrated Air Cargo Facility, as well as security enhancements and utility improvements.
In addition to the PacAir facility, several other freight companies have invested in the airport’s future operations in the form of new facilities. MSA Logistics’ 20,000-square-foot multimodal facility has been completed and could begin daily operations at any time, while CTSI Logistics is expected to complete construction of a new facility in August.
“Right now we’re constructing another facility at the airport … it will become our main airport facility, as the main [place of] use for air freight and logistics for the region. [The building] has 35,000 square feet in additional capacity. It’s part of our preparation for the buildup in the expectation of an increase in business,” says Lim.
In total, the three facilities make up an investment of $36.6 million dollars and offer more than 220,000 square feet in air cargo capacity. “The investments in these properties are expected to generate $35.5 million in revenue for the authority over the next 20 to 30 years,” says Torres. “Moreover, they will contribute to the authority’s continued efforts for the development of air cargo and other airport or aviation-related facilities in the Tiyan Business Park and Airport Industrial Park areas. Both areas are ready for development with utility infrastructure such as power and water already in place.”
A related project critical to these developments is the proposed Tiyan Parkway. This thoroughfare, which would connect Route 8 and Route16, is intended to improve access to the northern part of the island. The road would help relieve traffic congestion on Marine Corps Drive — something likely to be compounded by the rapid population increase to occur with the buildup — and it would have the added benefit of improving cargo transportation between the airport and the port.
GIAA says that it believes that by investing in new facilities, improved utilities and better access, it might create — as Torres puts it — a “major economic zone,” boosting its commercial appeal to both local and off-island businesses.
Ultimately, it is the goal of the freight sector’s plans on Guam to become more appealing to commercial interests, both in the Marianas region and outside it, despite the challenges. Among the challenges that are part of daily life on Guam and the Marianas — the isolated locale, the reliance on imports and the military buildup — perhaps the most important to the freight business is the last.
So much of the freight sector’s operational planning is reliant on whether or not the Marines make it to Guam in 2014, and that makes for a unique blend of cautious planning and high hopes. It could be the catalyst for success that the freight sector is preparing for. But until the final word on the military buildup is handed down, the answer to the question on the future of freight remains, “It depends.”