Freight Consolidation Study. Prepared for: University of Alaska Marine Advisory Program

Transcription

1 Freight Consolidation Study Prepared for: University of Alaska Marine Advisory Program August 2003

2 Freight Consolidation Study Prepared for: University of Alaska Marine Advisory Program Prepared by: August 2003

3 TABLE OF CONTENTS Executive Summary...i Freight Consolidation Concept... i Existing and Potential Demand... i Air Cargo Considerations... iii Operational Structure Alternatives... iii Revenue Potential... iv Introduction and Methodology...1 Introduction...1 Methodology...1 Existing Situation...3 Fresh Product Shipment from Southeast...3 Air Carrier Requirements...5 Legal Parameters...5 Communication is Key...5 Existing Shipper Challenges...6 Fresh Seafood Demand...8 Existing Situation...8 Demand Enhancement...9 Marketing...9 Branding...10 Country of Origin Labeling...10 Unmet Demand for Airfreight Service...11 Potential Operational Structures...14 Alternatives Analysis...14 Hub and Spoke One Southeast Community...14 Hub and Spoke Two Southeast Communities...15 Chain Link...17 Advantages and Disadvantages...19 One Hub...19 Two Hub...19 Chain Link...19 Management Options...20 Alternatives Analysis...20 Private Venture...20 Public Enterprise...20 Cooperative...21 Combination...21 Pilot Program...21 Technology Review...22 Needed Capability...22 Software Availability...22 Other Options...22

4 Table of Contents (continued) Scenario Analysis...24 Stakeholder Participation...24 Volume Requirements...24 Building and Personnel Requirements...25 Feasibility...26 A Normal Business Day...28 Web Site Update...28 Refrigerated Unit Status...29 Billing...29 Flight Scheduling...30 Coordinate with Other Potential Users...31 Member Update...31 Summary...33 Appendix...34 Contacts...34 LIST OF TABLES Table 6 Average Out-of-State Fresh Seafood Transport by Month for all Modes of Transportation..4 Table 7 Annual Percent Seafood Shipment by Species...4 Table 8 Average Shelf Life for Selected Southeast Alaska Fresh Seafood...7 Table 9 Fresh Seafood Production by Species Table 10 Approximate Harvest Timing by Species...12 Table 11 Existing Demand and Known Unmet Demand for Air Freight Shipment of Fresh Seafood...12 Table 12 Summary of Advantages and Disadvantages by Operational Structure...19 Table 13 Estimated Costs of Aircraft Operation...24 Table 14 Estimated Fixed and Variable Costs for Freight Consolidation Scenarios...26 Table 15 Estimate Pounds of Fresh Seafood Required by Scenario and Various Consolidation Fee Structures...27 LIST OF FIGURES Figure 1 Transport Modes for Southeast Alaska Fresh Seafood...3 Figure 2 Estimated Pounds of Fresh Seafood Product and Number of Monthly Air Cargo Flights Required...13 Figure 4 One Hub Operation - Hypothetical Configuration...15 Figure 5 Two Hub Operation Hypothetical Configuration...16 Figure 6 Chain Link Operation - Hypothetical Configuration...18

5 EXECUTIVE SUMMARY Freight Consolidation Concept The Petersburg Office of the Alaska Marine Advisory Program through the University of Alaska contracted the McDowell Group to review the issue of appropriate organizational structures and consider the feasibility for a freight consolidation facility. Fresh Southeast seafood currently moves to out-of-state markets in one of four ways: 1. Alaska Marine Lines loads refrigerated trailers on the Alaska Marine Highway ferry system headed to ports with road links (Skagway and Prince Rupert primarily). 2. Lynden transports fresh seafood on Evergreen Eagle Airlines using deficit cargo space for return flights under contract to the U.S. Postal Service. (These are Seattle based flights.) 3. Alaska Airlines takes fresh seafood on passenger flights depending on space availability and on dedicated cargo flights. 4. Charter flights are arranged by processors and sometimes catcher/processors when there is enough product to warrant a shipment. For purposes of this study, freight consolidation means shipment of fresh seafood product by air with a focus on the Southeast region. This focus was selected for study for three reasons: First, it addresses the most promising growth area of demand from the nearby U.S. market - high-quality, high-value, fresh product. Nearly all of Southeast Alaska s viable commercial stocks are fully utilized. Further growth of the regional industry depends upon maximizing value of the existing harvest rather than further increasing harvest volume. Second, air freight of fresh product in terms of both service and cost is a major issue in the region that, if enhanced, could have significant positive economic impacts for harvesters, processors, and air carriers. Third, a tightly focused study of this type can now serve as a model for other geographic areas and for expanding the freight consolidation concept to frozen product forms and the marine/land mode. Existing and Potential Demand McDowell Group conducted executive interviews with land-based processors between June and August of Processors were asked how much additional fresh seafood, if any, they would anticipate sending if there was regular cargo service available. Processors from Juneau did not see a need for additional cargo service as they already have access to cargo flights six days per week. Processors in Sitka, Wrangell, Ketchikan, Yakutat, and Petersburg indicated an interest in having Marine Advisory Program Freight Consolidation Study Page i

6 the capability of sending an estimated 5.2 million pounds of additional fresh product as a group. Processors surveyed account for 72 percent of all Southeast fresh seafood production for Alaska Department of Fish and Game records indicate an annual total of 14.5 million pounds of fresh seafood production for the year. This sum includes seafood that is unlikely to be shipped by air. Low values for pink and chum salmon and the long shelf life of halibut makes shipping these product by slower means more economical. Extrapolating from the total product minus pink and chum salmon and a portion of the halibut, the percentage of fresh seafood that processors say could be shipped suggests that more than 18 million pounds of fresh seafood product could be air shipped from Southeast. This represents more than a 7 million pound increase from (See Table 1.) Table 1 Existing Demand and Known Unmet Demand for Air Freight Shipment of Fresh Seafood Land Based Processors Catcher Processors/ Catcher Exporters Total Fresh Seafood ADF&G reported fresh seafood ,760,555 1,713,638 14,474,193 Less pink and chum salmon and 2/3 halibut 1 2,280, ,724 3,188,500 Total Existing Demand for Fresh Seafood 10,479, ,914 11,285,693 Known Unmet Demand for Fresh Seafood 2 6,600, ,000 7,100,000 Total Demand for Fresh Seafood 17,080,000 1,306,000 18,386, Pink and chum salmon are not included in the calculation for additional fresh seafood because these are low value species that are unlikely to be shipped by air freight. One-third of the halibut poundage has been included in the calculation because the long shelf life for this species makes movement by ferry or barge economical. 2. Processors interviewed indicated average additional pounds of 63 percent of their existing fresh seafood production if regular air service were available. For the month of June, there could be enough fresh seafood product to warrant three air cargo flights per day based on the reported needs of processors. In February and December, this number falls to three flights per week. At present, Alaska Airlines provides most of the air transport for this product as cargo on passenger planes and through specially chartered aircraft. Still other fresh product is sent by ferry or barge for overland transport. Marine Advisory Program Freight Consolidation Study Page ii

7 Air Cargo Considerations Aircraft operators report that the DC-6 aircraft is being phased out of the Lower 48 market. That means that these aircraft will soon become available for sale to other markets. This aircraft is the most economical in terms of price per pound for operations, requires a 4,000-foot runway for efficient operations, and has a cargo capacity of 30,000 pounds. The average cost per pound to transport fresh seafood to Seattle on a DC-6 is approximately $0.25 while the average cost for a 737 is $0.46 per pound according to the data provided by air operators. Table 2 Estimated Air Cargo Cost per Pound by Aircraft Type to Seattle Aircraft Type Quoted Cost to Without Backhaul With Backhaul Operate Min. lbs. Max. lbs. Average Min. lbs. Max. lbs. Average DC-6 $ 13,000 $ 0.52 $ 0.48 $ 0.50 $ 0.26 $ 0.24 $ 0.25 DC-9 21, , with more stops 33, , with more stops 47, Source: Alaska Airlines, Evergreen Eagle, Northern Air Cargo Operational Structure Alternatives Operational configurations for freight consolidation could take a number of forms. A hub and spoke configuration with one Southeast community designated as hub and all other participating Southeast communities forming the spokes is one option. Depending on the volume of fresh seafood and the level of community participation, it may be wise to have more than one Southeast hub so that fishermen s ability to deliver fresh seafood is maximized. Another alternative is a chain link configuration in which participating Southeast communities, each having refrigeration and runway capabilities to accommodate the aircraft, are responsible for gathering product for shipment by air cargo. The chain link configuration presents the greatest participation and reduced costs to fishermen and communities but creates greater operational costs for the air carrier. See Table 3 for a summary of the advantages and disadvantages of the three freight consolidation alternatives discussed in this study. Table 3 Summary of Advantages and Disadvantages for the Operational Structure Marine Advisory Program Freight Consolidation Study Page iii

8 Operational Structure Hub and Spoke - One Southeast Hub and Spoke - More than one Chain Link hub hub Air Cargo Mainline Cost Low Med High Transport Cost to Consolidation Facility High High Med Consolidation Operational Cost Low Med High Community Participation Low Med High Ease of Product Delivery - Fishers/Catchers/Processors Low Med High Ease of Product Delivery - Air Carrier High Med Low Consolidation Entity Worker Requirement Low Med High There are two main factors to consider when determining the feasibility of the freight consolidation program: 1) operations, consisting of infrastructure, communications, technology, and personnel, and 2) product supply and demand. Infrastructure, technology, and personnel for the start-up year could range from $650,000 to almost $3 million. Product supply is estimated to increase by more than 7 million pounds of known unmet demand. Additional demand beyond the known unmet demand is expected. Table 4 Estimated Fixed and Variable Costs for Freight Consolidation Structure Scenarios Hub and Spoke - One Southeast Community Hub and Spoke - Two Southeast Communities Chain Link - Five Communities Estimated Fixed Costs Refrigerated Facilities 425, ,000 2,125,000 Software 32,000 35,200 48,000 Estimated Total Fixed Cost $ 457,000 $ 885,200 $ 2,173,000 Estimated Variable Costs Personnel 158, , ,000 Property Lease 24,000 48, ,000 Utilities 15,000 30,000 75,000 Estimated Annual Operations $ 197,000 $ 331,000 $ 734,000 Total Fixed and Variable Estimates $ 654,000 $ 1,216,200 $ 2,907,000 Source: Structure costs estimates obtained from Minch, Ritter, Voelckers, architects, software estimate obtained from Penchant Software; and variable costs are McDowell Group estimates. The fixed and variable costs associated with the chain link configuration are greatest. However, the costs to participants (fishermen and processors) feeding into the chain link communities is least for the chain link configuration. Revenue Potential The configuration will depend, in part, on who will pay for this operation. McDowell Group asked processors if they would be willing to participate in the freight consolidation program if there were a fee of up to $0.05 per pound. Responses to this question varied. Most said they would be willing to pay up to $0.05 per pound as long as they could reduce their current air freight costs by an equal amount. Processors that we interviewed qualified their statements by saying their willingness to pay is linked to the higher savings associated with regular service and higher volumes. If costs were reduced more, it follows that fishermen would be willing to pay more for consolidation fees. Some processors mentioned the Marine Advisory Program Freight Consolidation Study Page iv

9 profit margins for different seafood product and only one processor said they would be unwilling to participate if there were a fee. If the freight consolidation structure were to charge a fee of $0.05 per pound, almost 5 million pounds of fresh seafood would be required for the one hub scenario. This poundage increases to 8.5 million for the two-hub scenario, and almost 19.5 million pounds of fresh seafood for the chain link alternative. Table 5 summarizes the number of pounds required for each scenario at the $0.03, $0.05, and $0.08 per pound consolidation fee. Table 5 Estimated Pounds of Fresh Product Required for Contribution to Costs for Freight Consolidation Structure Scenarios Hub and Spoke - One Southeast Community Hub and Spoke - Two Southeast Communities Chain Link - Five Communities Consolidation fee - $0.03 per pound Pounds of fish needed for variable costs 6,566,667 11,033,333 24,466,667 Pounds of fish for fixed cost contribution 1,672,500 3,239,700 7,952,800 Total pounds for fixed and variable costs 8,239,167 14,273,033 32,419,467 Consolidation fee - $0.05 per pound Pounds of fish needed for variable costs 3,940,000 6,620,000 14,680,000 Pounds of fish for fixed cost contribution 1,003,500 1,943,800 4,771,700 Total pounds for fixed and variable costs 4,943,500 8,563,800 19,451,700 Consolidation fee - $0.08 pound Pounds of fish needed for variable costs 2,462,500 4,137,500 9,175,000 Pounds of fish for fixed cost contribution 627,200 1,214,900 2,982,300 Total pounds for fixed and variable costs 3,089,700 5,352,400 12,157,300 Freight consolidation offers other benefits that are not measured here. These include jobs created in the communities electing to participate in the consolidation service and fishermen and processors ability to sell more product for higher prices. Communities may also benefit from the increased tax base for infrastructure and fish landings. In addition, revenue potential may be higher than described in this report if the consolidation facility is able to attract other air cargo customers. Marine Advisory Program Freight Consolidation Study Page v

10 INTRODUCTION AND METHODOLOGY Introduction Methodology The Petersburg Office of the Alaska Marine Advisory Program through the University of Alaska contracted the McDowell Group to review the issue of appropriate organizational structures for a freight consolidation facility. The focus of the freight consolidation project is fresh seafood originating in Southeast Alaska waters. If successful, this program could be adapted for other Alaska regions as well. At a recent Southeast Alaska Economic Forum, Marc Jones from the Alaska Fisheries Development Foundation stated that there are three main areas of focus for fisheries industry success: Price, Quality, and Reliability. The intent of the freight consolidation program focuses on those three areas, obtaining the highest price for Alaska s wild products, ensuring the greatest quality standards, and addressing the issue of reliability when the supply is dependent on the unpredictable returns of wild stocks. For purposes of this study, freight consolidation means shipment of fresh seafood product by air and the focus is on the Southeast region. The fresh seafood air method of freight consolidation in Southeast Alaska was selected for this study for three reasons: First, it addresses the most promising growth area of demand by the nearby U.S. market - high-quality, high-value, fresh product. Nearly all of Southeast Alaska s viable commercial stocks are fully utilized. Further growth of the regional industry depends upon maximizing value of the existing harvest rather than further increasing harvest volume. Second, air freight of fresh product in terms of both service and cost is a major issue in the region that, if enhanced, could have significant positive economic impacts for harvesters, processors, and air carriers. Third, a tightly focused study of this type can now serve as a model for other geographic areas and for expanding the freight consolidation concept to frozen product forms and the marine/land mode. This study explores various types, functions, and legal parameters for a consolidation facility/structure and includes the results of discussions with government agencies, fishermen and processors, assessment of existing consolidation facilities, and review of referenced materials. Interviews were conducted with air cargo carriers operating in the state to determine the cost of moving freight and understand some of the challenges from the air transportation viewpoint of moving fresh and live seafood from Southeast waters. Additional interviews were conducted with marine and land transportation service providers to assess the alternatives to moving fresh seafood by air. Research was also conducted with freight logistics companies and refrigerated freight movers, both in-state and out-of-state in order to glean some insight to the movement of Marine Advisory Program Freight Consolidation Study Page 1

11 Alaska s seafood: the various types of transportation, costs information, time constraints, and typical destinations. Key considerations in developing the operational and management options discussed in this report are whether fishermen and processors would be interested in participating in a freight consolidation program, assessing their level of interest, and developing options that benefit all the stakeholders. Toward that end, interviews were conducted with processors and catcher/processors operating in Southeast. Due to timing of the study, catcher/processors were mostly unavailable. Alaska Department of Fish and Game, Commercial Operators Annual Report database, however, provided valuable information on the pounds and species of fresh seafood produced by catcher/processors (sometimes referred to as direct marketers) and catcher/exporters. This report describes the existing situation of movement of fresh seafood from Southeast waters, explores potential operational structures and management options, reviews technology, examines three potential scenarios, and then describes a normal business day in the freight consolidation program as it is currently envisioned. Marine Advisory Program Freight Consolidation Study Page 2

12 EXISTING SITUATION Fresh Product Shipment from Southeast Fresh Southeast seafood currently moves to out-of-state markets in one of four ways: 1. Alaska Marine Lines loads refrigerated trailers on the Alaska Marine Highway ferry system headed to ports with road links (Skagway and Prince Rupert primarily). 2. Lynden transports fresh seafood on Evergreen Eagle Airlines using deficit cargo space for return flights under contract to the U.S. Postal Service. (These are Seattle based flights.) 3. Alaska Airlines takes fresh seafood on passenger flights depending on space availability and cargo flights. 4. Charter flights are arranged by processors and sometimes catcher/processors when there is enough product to warrant a shipment. Alaska Marine Lines moves a large portion of fresh seafood from Southeast Alaska. A refrigerated trailer load of fresh seafood leaving Ketchikan will arrive in Seattle approximately 36 hours later and that same trailer load leaving Juneau would arrive in Seattle in approximately 60 hours. Fresh seafood with a long shelf life will probably continue to move by this method. Deficit space on U.S. Postal Service flights and available cargo space on passenger flights are not certain. Mail and passengers take priority. Charter flights are typically dedicated to the transport of the seafood but are often expensive and depend on plane availability, weather, and other factors. Charter flights would more often move the product from a community without a large airport to a community with large aircraft capabilities (i.e. a charter flight from Metlakatla to Ketchikan). Figure 1 Transport Modes for Southeast Alaska Fresh Seafood Charter Flights 1% Ferry 32% Alaska Airlines 66% Deficit Mail 1% Marine Advisory Program Freight Consolidation Study Page 3

13 Table 6 summarizes the average annual movement of fresh seafood by the various transportation modes. These estimates are based on executive interviews with the transport providers. Very little data was available on the movement of fresh seafood by charter plane so this category has been omitted from the table. Table 6 Average Out-of-State Fresh Seafood Transport by Month for all Modes of Transportation (in Pounds) Month Ferry 1 Deficit Mail 2 Planes 3 Passenger Jan 29, ,000 Feb 43, ,800 March 203, ,400 April 314,088 1,311,400 May 678,500 1,880,200 June 980,441 21,750 2,638,600 July 2,762,588 36,250 2,385,800 Aug 1,318,824 36,250 2,275,200 Sept 1,089,765 29,000 1,358,800 Oct 242,941 21, ,800 Nov 38, ,000 Dec 41, ,600 Totals 7,742, ,000 15,800, Alaska Marine Lines 2. Evergreen Eagle Airlines 3. Alaska Airlines Note: Alaska Airlines shipment of fresh seafood includes non-commercial fish shipments and packaging weight. Ferry shipment of fresh seafood can only occur for species with a fairly long shelf life. Halibut, salmon, and cod all have shelf lives of approximately 10 to 12 days so shipment via Alaska Marine Highway System with Alaska Marine Lines is feasible. Table 7 shows the average annual percent of seafood shipment by transportation mode. This information was obtained from interviews with the primary transshipment agents. Again, charter planes are not included. Table 7 Annual Percent Seafood Shipment by Species Species Ferry 1 Deficit Mail 2 Planes 3 Passenger Salmon 50% 100% 60% Halibut 15% 15% Cod 3% Crab 30% 10% Shrimp 10% Geoducks 5% Sea Urchins 2% Total 100% 100% 100% 1. Alaska Marine Lines 2. Evergreen Eagle Airlines 3. Alaska Airlines Marine Advisory Program Freight Consolidation Study Page 4

14 Air Carrier Requirements Airline executives are most concerned with leakage of seafood product in flight. Leakage of product can damage passenger baggage or other cargo and even the aircraft itself. Generally, air cargo carriers require totes or wet lock boxes. Size of the container is important for some plane configurations. Many commercial airlines have published seafood packaging guidelines. Typically, the inner packaging must completely enclose the product in strong, securely sealed polyethylene bags. There is a minimum one 4-mil bag or two 2-mil bags. The bags must be packed securely and padded to avoid shifting. Some airlines require additional absorbent material between the polyethylene bags and the outer or inner container. Packages should be able to withstand shock and be stacked at least five units high as resistance to external punctures is critical. Corrugated paperboard (wax-saturated or otherwise water-resistant) or solid fiberboard boxes are acceptable. There must be a minimum of at least two bands around the width of each box and individual boxes should not weigh more than 150 pounds. Airlines operating smaller aircraft prefer gross weight limits of 60 to 80 pounds per package. The seafood shipment must be packed with sufficient refrigerant to withstand a 48- hour transit time for a domestic shipment. Wet ice is not permitted. Most airlines recommend gel packs. Live seafood should be maintained and shipped between 34 and 45 degrees Fahrenheit. Live seafood should not be in sealed bags as air is essential. All seafood product must be clearly marked. Legal Parameters Seafood packaging guidelines are established by individual air carriers except when using dry ice as a refrigerant. Because it transforms from solid to gaseous carbon dioxide, dry ice has the ability to displace oxygen in enclosed spaces and has been labeled a dangerous good. Shippers using dry ice must comply with specific governmental regulations. Dry ice packaging must allow dioxide gas to escape without rupturing the package and packages must be clearly marked with the net quantity of dry ice. Carriers must notify pilots of the presence of dangerous goods and must obey Federal regulations restricting the total amount of dry ice to 440 pounds per inaccessible cargo compartment. Seafood labeling requirements for product shipped by air cargo are also mandated by government regulations. Labels should be descriptive such as THIS SIDE UP, PERISHABLE FRESH HALIBUT, or LIVE SEAFOOD. It is essential that complete contact information be displayed on the outside of the carton and on the air waybill. Inclusion of a 24-hour telephone number of the shipper is essential on the air waybill, as well as on the container. Additional labeling requirements are needed for international air cargo shipments. Communication is Key Through the cooperation of the Air Transport Association of America (ATA) and the National Fisheries Institute (NFI), voluntary guidelines for the handling, packaging, and acceptance of fresh fish and seafood were developed. These guidelines are meant to reduce conflict between carriers and shippers but are not an alternative to communication between carrier and shipper. Each operation has its own unique set Marine Advisory Program Freight Consolidation Study Page 5

15 of standards and it is important to plan those steps in the early stages of negotiating to avoid problems. Highlights from the ATA/NFI guidelines follow: Select appropriate packing materials according to durability, watertightness, and insulation, Cool fish to 32 F before packing, Pre-chill the shipping container, Take care to avoid overfilling container, Gel refrigerants, dry ice, and wet ice sealed in polyethylene bags should be placed along the bottom and at the top of the container, Minimize the time in transit from refrigeration to airport, Select only very healthy seafood for live shipment, Live seafood packaging should be capable of maintaining temperatures in the 34 to 45 F range, Do not seal bags containing live seafood, Establish quick and efficient packing procedures to minimize handling time and temperature rise. The ATA/NFI guidelines suggest that if time permits, it is most effective to process and cool product one day, and ship it the next. Existing Shipper Challenges The reliance on passenger-cargo combinations for the transshipment of fresh seafood product is not ideal. Inadequately packaged product can be damaging to the aircraft, passenger baggage, or other cargo and creates a significant liability hazard to the air carrier. In addition, passenger-cargo configurations do not lend themselves easily to cargo loading. For instance, in a straight-up cargo configuration, fresh seafood can be palletized and loaded on to the aircraft with a forklift. While for the passenger-cargo configuration, the fresh seafood must be hand loaded which adds time to the loading and unloading of aircraft and poses an additional risk of injury to airline workers, another liability hazard to the air carrier. Inadequately packaged or handled product can also lead to financial harm to fishermen and processors. Minimizing the fluctuations in temperature for live seafood product is essential to maximize the shelf-life and eventual profits. Bacteria grow fastest at temperatures between 80 and 100 F when the number of bacteria doubles every minutes. Bacteria growth slows considerably at 32 F, when the number doubles every 8 days. For example, if 10 days of shelf-life are expected for fish held at 32 F, the expected shelf-life is reduced to a mere 36 hours when the same fish is held at 50 F. Table 8 summarizes the average shelf life of fresh seafood product. Cargo planes dedicated to the transport of product can be better coordinated to minimize improperly handled seafood so that air carrier personnel are not required to choose between caring for passengers and unloading cargo. Marine Advisory Program Freight Consolidation Study Page 6

16 Table 8 Average Shelf Life for Selected Southeast Alaska Fresh Seafood Seafood Product Average Shelf-Life Salmon days Salmon (Roe) 2-3 days Sablefish 14 days Halibut 14 days Cod days Crab Sent Live Shrimp Sent Live Herring Roe 4-5 days Geoducks 3 days Source: Dr. Chuck Crapo - Fishery Industrial Technology Center (FITC) and Julie Decker - Southeast Alaska Regional Dive Fisheries Association (SARDFA). Airline industry executives are also charged with maximizing profits. Given a choice between selecting high-revenue passengers or low-revenue cargo, they will select the passengers. For airplanes that are traveling at less than full capacity, cargo is an added bonus. However, when passengers elect to travel at the last moment, cargo runs the risk of being bumped from the flight. For the passenger-cargo configurations, cargo will be the lesser priority. The airline industry engages in complicated pricing schedules. They must take into consideration the operating requirements and limitations for each type of aircraft, the travel distance, crew needed, airport limitations, federal regulations, and other factors. Volatility in carrier pricing occurs due to uncertainty in future travel plans and marketing strategies. For example, the price of a ticket from destination A to B will be available at $200 if purchased two months in advance of travel, then the price falls to $180 due to a marketing push one month in advance, then the price rises again after passing the 14-day prior-to-travel mark, and then could fall yet again the weekend before travel due to available seating. Pricing issues for cargo vary as well depending on negotiated rates. Entry and exit from the airline market could also be a problem, though Alaska has been stable in recent years. Changes in airline industry participation could occur as a result of the U.S. Postal Service awarding mail service to an alternate carrier. Entry or expansion of air service by other airlines could also lead to different pricing strategies or offerings. Supply of fresh seafood product is a significant challenge for all those involved in the marketing and shipping of seafood. The volume of the harvest and timing of landings can vary based on a wide variety of factors. The fisher must organize crew, obtain gear and supplies, and be on the fishing ground when the fish arrive; the processor must hire and train personnel and schedule workers so they are ready for fish delivery; while the transportation industry, be it air, marine, or land, must have personnel and equipment ready to move the product. Reliance on passenger-cargo configurations, inadequately packaged or handled product, transportation price volatility, and uncertain fresh seafood supply are not the only challenges to maximizing the fresh seafood market. Fresh seafood demand and price are subject to fluctuations as well. Marine Advisory Program Freight Consolidation Study Page 7

17 FRESH SEAFOOD DEMAND Existing Situation McDowell Group contacted land-based processors, direct market fishing vessels, and shellfish harvesters with active permits operating in Southeast waters to determine the number of pounds and species of fresh seafood currently being shipped out of Southeast. This information was supplemented with data from the Alaska Department of Fish and Game, Commercial Operators Annual Report database which contains production information. The data was sorted by species to select only those records that indicated fresh product. The focus of this fresh seafood demand assessment is on transshipment that can not be met by Alaska Marine Lines. For instance, the 14-day shelf life for halibut still makes shipping by AML and land transport a much more economical method for getting fresh halibut to market. Freight consolidation at the airports could not compete with the low prices offered by AML for product with a somewhat longer shelf life. For instance, refrigerated trucks can carry fresh seafood for 15 to 20 cents a pound, backhaul to Anchorage is as low as 8 cents a pound, and even trucks heading to Boston can carry product for as low as 28 cents a pound compared to flying from Southeast to Boston for double the cost. However, fresh seafood with a shorter shelf life and higher ex-vessel value are prime candidates for air freight transshipment. Table 9 summarizes fresh seafood production obtained from Alaska Department of Fish and Game fish ticket information. For confidentiality reasons, some of these totals were suppressed. Land-based processors who participated in interviews asserted that they would send 63 percent more product if regularly scheduled air service was available. Marine Advisory Program Freight Consolidation Study Page 8

18 Table 9 Fresh Seafood Production by Species 2002 (in pounds) Land Based Processors Catcher Processors/ Catcher Exporters Salmon King 1,178,161 16,616 Sockeye 471,711 59,538 Coho 1,050,002 58,505 Pink 617,216 Chum 1,944,561 Salmon Roe 989,033 Rockfish 679,931 Halibut 5,640,508 Cod 166,911 King Crab 313,747 Dungeness Crab 882, ,588 Shrimp 41,972 12,710 Geoducks 165,062 Oysters 700 Sea Cucumbers 1,200 Total Fresh Product 1 12,760,555 1,713, Alaska Department of Fish and Game Fish Tickets - Fresh Production by Species for Commercial Operators Annual Report (COAR) database run 8/6/03. Column may not total due to confidential information. Space for fresh seafood originating from the Juneau airport is typically readily available since Juneau has six cargo planes per week leaving the airport. These planes rarely leave full making for excess capacity. The only limiting factors for fresh seafood leaving Juneau are weather conditions and availability of product. Processors in Juneau remarked that if they could find customers, they would air freight more fresh product. Ways to find additional customers include differentiation, marketing, and ensuring high quality product. Demand Enhancement There are multiple success stories for enhancing demand through marketing and branding as has been done with computer technology, automobiles, wine, cheese, and meat. As much as Alaskans like to criticize the farmed seafood industry, overall consumption of seafood has increased in part as a result of farmed seafood operations. Key to capitalizing on the farmed effort is the offer of high-quality seafood, increased awareness of the health benefits of wild seafood, consolidated retail buying power, and improved supply chain management. Alaskan seafood can benefit from this farmed effort and take the bar one step higher. Differentiating Alaskan seafood from farmed product is the key. There are two main methods for achieving this goal: marketing and branding. Marketing Marketing of Alaska seafood currently takes place through the Alaska Seafood Marketing Institute (ASMI), the Alaska Fisheries Development Foundation (AFDF), Marine Advisory Program Freight Consolidation Study Page 9

19 and processors and retailers. ASMI will spend about $18 million this fiscal year on marketing. Partly as a result of ASMI s marketing work in 2000, Alaska seafood ranked as the third most common branded food item mentioned on the menus of the top 500 restaurant chains in the U.S. 1 Alaska Fisheries Development Foundation is another success story in marketing. AFDF is a private non-profit corporation dedicated to creating opportunities for Alaska's commercial fishing industry. AFDF hosts the annual Alaska Symphony of Salmon which became the Alaska Symphony of Seafood in 1998, and they sponsor and conduct research and demonstration projects that are too risky or expensive for a single company to conduct. Individual processors such as Trident and Ocean Beauty conduct their own marketing. A recent campaign strategy by Governor Frank Murkowski allows for matching grants to processors for their own marketing programs. Marketing effort must serve to strategically differentiate Alaska seafood product from that obtained elsewhere. Alaska can position itself as offering a unique product and in many ways has already done so with the Alaska brand. Branding Regional efforts at branding have had some degree of success: Aleutia, Kenai Wild, Copper River, and Kodiak to name a few. Along with names that fishermen hope will catch on, the newest brands sport third-party inspection to ensure quality. In the face of low ex-vessel prices, fishermen in the Aleutians East Borough teamed up with the Borough and AFDF to launch a direct marketing campaign. Instead of hauling in their catch, then looking for someone to buy it, they gathered orders and fished to meet them, delivering to customer specification. That practice became the promise of their new brand, Aleutia Salmon. 2 The Kenai Wild Cook Inlet Salmon Branding program earned national recognition this year from the National Association of Counties, which awarded the Kenai Borough its 2003 Achievement Award. Kenai has enjoyed success with its efforts to advertise Copper River Reds which are in high demand on the West coast. Another example of branding is Snow Pass Coho summer salmon. This program is in its infancy but already enjoying some degree of success. The Southern Southeast Regional Aquaculture Association created a logo and advertise their product as unique, rare, and high quality. Country of Origin Labeling On May 13, 2002, President Bush signed into law the Farm Security and Rural Investment Act of 2002, more commonly known as the 2002 Farm Bill. One of its many initiatives requires country of origin labeling (COOL) for beef, lamb, pork, fish, perishable agricultural commodities, and peanuts. COOL may be provided by a label, stamp, mark, placard or other clear and visible sign at the final point of sale. As described in the legislation, program implementation is the responsibility of USDA's Agricultural Marketing Service. 3 The law requires country of origin labeling for all covered commodities sold at retail beginning September 30, Wild fish is 1 Alaska Seafood Domestic Foodservice Program, Alaska Seafood Marketing Institute Annual Report Pacific Fishing, June 2003 Salmon Preview, Alaska Fights for Markets by Brad Warren. 3 U.S. Department of Agriculture, Agricultural Marketing Service, Marine Advisory Program Freight Consolidation Study Page 10

20 defined as one of the covered commodities. The legislation also requires COOL to distinguish between wild fish and farm-raised fish. The purpose of COOL is to provide consumers with country of origin information; it is not intended to be a food safety measure. Because COOL only covers certain commodities sold at certain retail establishments, it does not provide the type of universal assurance of food safety that consumers expect. While not marketing or branding, per se, COOL is one of multiple means for Alaskan seafood product to be differentiated. Since more than 90 percent of 2002 U.S. salmon imports were farmed, this presents opportunities for Alaska wild salmon to be branded and marketed as a specialty product and differentiate between farmed and wild salmon. 4 Unmet Demand for Airfreight Service McDowell Group conducted executive interviews with land-based processors between June and August Processors were asked how much additional fresh seafood, if any, they would anticipate sending if there was regular cargo service available. Processors from Juneau did not see a need for additional cargo service as they already have access to cargo flights six days per week. Processors in Sitka, Wrangell, Ketchikan, Yakutat, and Petersburg were interviewed and as a group indicated an interest in having the capability to send additional fresh product. A comparison of quantities of fresh seafood product revealed in executive interviews with the Alaska Department of Fish and Game records for 2002 suggests that McDowell Group was able to contact processors in Southeast responsible for 72 percent of all fresh seafood production for the year. Alaska Department of Fish and Game records indicate a total of 14.5 million pounds of fresh seafood was produced. Extrapolating from the total product minus pink and chum salmon and a portion of halibut, the percentage of fresh seafood that processors say could be shipped suggests that more than 18.4 million pounds of fresh seafood product could be shipped from Southeast. This represents more than a 7 million pound increase from (See Table 11.) Salmon generally requires shipping from June through August, halibut March through November, and for the rest of the species, shipping occurs sporadically throughout the year. Table 10 summarizes a typical harvest schedule by species. 4 National Marine Fisheries Trade Database - Marine Advisory Program Freight Consolidation Study Page 11

21 Table 10 Approximate Harvest Timing by Species Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Chinook salmon x x x x x x x x x x x x Sockeye salmon x x x Coho salmon x x x x Pink salmon x x x Chum salmon x x x x Sablefish x x x x x x x x x Halibut x x x x x x x x x Rockfish x x x x Lingcod x x x x Pacific Cod x x x x x x x x x x x x King crab x x x x x Dungeness crab x x x x x x x x Tanner crab x x Pot-gear shrimp x x x x x x x x Herring Roe x x x Urchins x x x x x x x Geoducks x x x Sea Cucumbers x x x x Note: This chart represents approximate time frames when product is available and may not match open seasons. Assuming that pink and chum salmon s relatively low values will make air shipment uneconomical and that halibut s long shelf life allows 2/3 of this species to be shipped by AML, the potential fresh seafood air shipment total falls to 11.3 million pounds. Using the estimate obtained from processors that 63 percent of additional fresh seafood could be shipped, the existing unmet demand for fresh seafood from Southeast Alaska is more than 18 million pounds. Table 11 Existing Demand and Known Unmet Demand for Air Freight Shipment of Fresh Seafood Land Based Processors Catcher Processors/ Catcher Exporters Total Fresh Seafood ADF&G reported fresh seafood ,760,555 1,713,638 14,474,193 Less pink and chum salmon and 2/3 halibut 1 2,280, ,724 3,188,500 Total Existing Demand for Fresh Seafood 10,479, ,914 11,285,693 Known Unmet Demand for Fresh Seafood 2 6,600, ,000 7,100,000 Total Demand for Fresh Seafood 17,080,000 1,306,000 18,386, Pink and chum salmon are not included in the calculation for additional fresh seafood because these are low value species that are unlikely to be shipped by air freight. One-third of the halibut poundage has been included in the calculation because the long shelf life for this species makes movement by ferry or barge economical. 2. Processors interviewed indicated average additional pounds of 63 percent of their existing fresh seafood production if regular air service were available. Marine Advisory Program Freight Consolidation Study Page 12

22 Using the assumptions for total pounds by species and the typical harvest schedule, McDowell Group estimated the pounds and number of monthly flights necessary to move fresh seafood (See Figure 2). Flights are estimated to carry an average of 30,000 pounds of cargo (26,250 pounds of product and 3,750 pounds of packaging). Figure 2 Estimated Pounds of Fresh Seafood Product and Number of Monthly Air Cargo Flights Required 3, , ,700 Estimated monthly air cargo flights required. 100 Pounds of Fresh Product (000's) 2,200 1, Number of Monthly Flights 1, Estimated pounds of fresh seafood by month Jan Feb March April May June July Aug Sept Oct Nov Dec - For the month of June, there is enough fresh seafood product to warrant three air cargo flights per day. In February and December, this number falls to three flights per week. Marine Advisory Program Freight Consolidation Study Page 13

23 POTENTIAL OPERATIONAL STRUCTURES Alternatives Analysis Cool chain management, as it is referred to in logistics transportation, is essential for preserving the harvested quality of fresh product. Breaks in the chain have a cumulative effect on reducing the potential shelf life of product. Efforts to reduce breaks in the cool chain can only have a positive effect on optimizing the shelf life, quality, and sales price of fresh product. These efforts start on the boats as fully informed fishermen obtain training for themselves and their crew on the proper handling of fresh product. Communities wishing to attract these fishermen offer refrigeration capabilities, ice, and other services that add value to the fresh product. Air carriers, processors, and fishermen must work together to ensure that Alaskan fresh fish gets to market quickly. Operational configurations for freight consolidation could take a number of forms. A hub and spoke configuration with one Southeast community designated as hub and all other participating Southeast communities forming the spokes is one option. Depending on the volume of fresh seafood and the level of community participation, it may be wise to have more than one Southeast hub so that fishermen s ability to deliver fresh seafood is maximized. Another alternative is a chain link configuration in which participating Southeast communities, each having refrigeration and runway capabilities to accommodate the aircraft, is responsible for gathering product for shipment by air cargo. The following examples discuss these options in more detail. Southeast communities are named in some of these scenarios merely as examples. This analysis is conceptual and not meant to imply that any of these communities are preferred to act as the hub for freight consolidation. While Southeast Alaska is the focus of this discussion, this analysis recognizes that other communities and areas of the state could also benefit from a fresh seafood freight consolidation facility/structure. After discussing these scenarios in more detail, an analysis of the advantages and disadvantages of each of these configurations is also examined. Hub and Spoke One Southeast Community This alternative envisions that one Southeast community would be the collection point for fresh seafood product. This community would need sufficient refrigeration space to accommodate at least 30,000 pounds of fresh product, personnel to collect the fresh seafood and ensure that product is packaged properly and ready for transshipment. Also required is an airport location with maximum take-off and landing capability, and ample runway length to accommodate fully loaded aircraft. This alternative would be the most costly to fishermen and processors furthest from the hub. Both Petersburg and Sitka sit generally in the middle of the Southeast communities and either of these could act as the southeast hub for the consolidation structure. The Sitka airport is not weight restricted and generally enjoys better take-off and landing conditions so Sitka is used as the hub in this example. Sitka would need to Marine Advisory Program Freight Consolidation Study Page 14

24 construct a refrigeration facility at the airport capable of holding at least 30,000 pounds of fresh seafood to accommodate a 737, or DC-9, or even DC-6, all of which would be capable of transporting fresh product to either Seattle or Anchorage. A larger refrigeration facility would be preferred so that product can continue to be delivered for transshipment even after a full planeload has arrived. Feeder planes capable of holding 7,000 to 10,000 pounds of fresh product would arrive regularly from other southeast communities. Examples of these aircraft are the Kossa capable of hauling 5,000 to 6,000 pounds of cargo or the F-27 capable of transporting up to 12,000 pounds. These planes would deliver the fresh product to the refrigeration facility at Sitka, where the labeling would be checked for accuracy and completeness, and the product would be consolidated with other fresh product and palletized while awaiting the next cargo plane. Figure 3 One Hub Operation - Hypothetical Configuration (This graphical depiction does not constitute endorsement of any community.) Yakutat Haines Juneau G ustavus Hoonah T o A n c h o r a g e Sitka Kake P etersb u rg To Seattle W r a n g e ll Ketchikan Hub and Spoke Two Southeast Communities There is sufficient fresh seafood supply to warrant more than one hub for Southeast. This alternative envisions two hubs: Juneau and Petersburg. These communities have been used in the example but are not meant to imply preferred choices. Again, Marine Advisory Program Freight Consolidation Study Page 15

25 refrigeration space would need to be available at the airports and labeling would need to be checked for accuracy and completeness prior to loading on the cargo plane. The entity coordinating the freight consolidation would need to be cognizant of the fresh seafood traveling from all Southeast communities. For instance, if the cargo plane typically originates from northern destinations and plans arrival in the northern hub first (Juneau in this example), a situation could arise where fishermen and processors delivering to Juneau get preference as a result of being the first stop and the southern hub product (Petersburg in this example) is bypassed. Some mechanism needs to be in place to ensure fairness to participating hubs in this transportation scheme. If the southern hub fishermen and processors perceive unfair treatment, their continued involvement in the freight consolidation effort would likely end. Airline executives indicate that the cost to operate an airplane making multiple stops on the way to its final destination increases. For instance, a 737 making one stop costs approximately $24,000 for a flight to Seattle. The same plane making multiple stops has increased costs of up to $33,000 for the same destination. This increases freight costs from $0.46 to $0.63 per pound, assuming a full load. Fishermen and processors distant from the two hubs in this example would incur greater costs moving fresh seafood to the hub locations. Figure 4 Two Hub Operation Hypothetical Configuration (This graphical depiction does not constitute endorsement of any community.) Y a k u t a t T o A n c h o ra g e H a in e s G ustavus Hoonah Juneau S it k a K a k e Klawock Petersburg C r a ig W r a n g e ll Hydaburg To Seattle K e t c h ik a n Marine Advisory Program Freight Consolidation Study Page 16