Rakesh Shalia Manager – Strategic Market Analysis March 18, 2005

1. 30th Annual FAA Aviation Forecast Conference Coping With U.S. International Air Cargo Trade Imbalance Rakesh Shalia Manager – Strategic Market Analysis March 18, 2005

2. U.S Trade Deficit • U.S. trade gap was record high in 2004. It rose to 24.4% • U.S. annual goods deficit has been increasing since last ten years. In 1995 the goods deficit was 13 % and in 2004 it was 29.2 % Data Source: Commerce Department

3. U.S Air Trade Imbalance • During 1995 there was no issue about air trade imbalance • In 2004 the trade imbalance ratio (Import/Export) was 1.5:1 leading to significant network planning issues. • Since imports tend to be lighter than exports, the container imbalance is even higher. Data Source: Commerce Department Data Source: U.S. Bureau of Economic Analysis

4. Air Trade Imbalance: U.S. International Lanes • The air trade imbalance ratio in CY 2004 for Asia was 1.8, Europe was 1.3, and South America was 1.9 • In last two years the trade imbalance declined on US-EU lane • In 2004 the trade imbalance increased on US-Asia lane Data Source: Commerce Department

5. Countries Contributing to U.S. Air Trade Imbalance • China significantly contributes to U.S. international air trade imbalance Data Source: Department of Commerce

6. Factors Causing Trade Deficit The trade imbalance/deficit is primarily driven by several macro economic factors: • Economic activity (GDP) in US & other regions (US Economy spends more than it produces) • Interest rates between countries • Exchange rates • Business outsourcing • Oil prices

7. Regional Factors Impacting Lane Imbalance • The weakening of US dollar improved the US exports, primarily to Europe, thereby reducing the trade imbalance • The US deficit with China was up 30.5% from last year and was the largest imbalance recorded with a single country • Pegging of Chinese Yuan to US dollar may have contributed to trade woes • The gap has been increasing due to increase in oil prices. However, in Dec'04 the gap narrowed due to slide in oil import prices

8. Trade Imbalance Issues for Air Cargo Carriers • Air Networks are getting constrained in one direction • Air cargo carriers have no trouble in filling their U.S. inbound flights with high-value cargo like electronics and consumergoods. • US outbound flights achieve lower yields and load factors, offsetting some of the profitability of the return flights. • Cannot introduce additional capacity on round trip basis since the flights are not profitable

9. Coping Strategies of Air Cargo Carriers • Introduce round the world flights to maintain the optimum load factors. • In March'05, FedEx launched new westbound around-the- • world flight • This is the express cargo industry's first direct • connection between mainland China and Europe • Improve cargo densities on the constrained legs • Yield management based on network capacity optimization

10. Coping Strategies of Air Cargo Carriers • Develop partnerships in US to boost exports • The Commerce Department’s U.S. Commercial Service (USCS) has partnered with FedEx to provide ongoing support to Commercial Service efforts aimed at boosting exports from U.S. small and medium-size businesses. • FedEx will inform its customers about the benefits of the USCS worldwide export assistance network of 108 domestic offices and 149 posts in 78 countries that provide export assistance

11. Coping Strategies of Air Cargo Carriers • Integrators are expanding their product portfolio and providing supply chain management & value added services • Develop other modal options like ocean, road, and rail, etc.

12. Questions ? ? ? ? ?