Are Air Cargo Costs About to Go Sky High?

News that two explosive devices were found in packages on U.S.-bound cargo planes Friday has set off a new round of alerts worldwide. It's also raising new questions about security in the air-freight industry -- and its potential cost.

The companies directly affected by the suspicious packages are, unsurprisingly, saying very little about the incidents except that they are cooperating with authorities and handling the crisis.

FedEx spokesman Jim McCluskey says his company has developed a good reputation over the years for its planning for contingencies ranging from natural disasters to political unrest. "If you look at the flexibility we have with our hub system, with our aircraft, with our ground fleets," he says, "we are able to adjust our network accordingly to mitigate any effect to service anywhere in the world."

But industry observers say they've anticipated this threat for some time now. "With cargo we have quite a porous border; we're quite dependent upon globalization of products from around the world," says Professor Scott Johns, a former airline pilot and special assistant for the U.S. Department of Homeland Security who now teaches at the University of Denver's Strum College of Law. "If there's any place we want the 100% [security] all the time, it's in the aviation industry. And the fact that things are getting through raises questions."

Much Less Scrutiny for Cargo

Individuals and organizations sending air cargo are usually subject to background checks and packages are screened before flights, but air shipments still come under much less scrutiny than most airline passengers and their luggage, Jones notes.

Part of the issue, he says, is logistics: It's very time-consuming for companies and government agencies to carefully examine every piece of air freight, which often includes expensive perishable items. And cargo is an important contributor to revenue. "What sort of keeps the airlines afloat in rough times is the cargo in the belly of the jet," Johns says. "You've got the U.S. Mail, you've got flowers coming up north from South America."

The aviation sector has been trying to find ways to keep air-cargo security cost-efficient. Earlier this year, British Airways World Cargo and DHL Global Forwarding agreed to share information and standardize procedures for high-value and high-risk air cargo.

"Both parties can now combine their expertise to contribute jointly making the supply chain more secure," DHL executive Michael Schaecher said in a press release in March. "The close cooperation with our main partners in the airline sector is an essential part of our strategic direction to our customers with the best-in-class security approach."

The Cost of Keeping Cargo Secure

While there's no public data about the price of keeping air cargo secure, it probably still costs the industry a lot less than expenditures for fuel, maintenance and manpower. Air-cargo companies like FedEx and UPS have a track record of profitability despite hard times, "because we're a society that likes to have today's goods today -- and people are willing to pay for that," Johns says.

The air-shipping industry has done well in the recession, with world demand growing since 2008 and 2009, notes Ron Rizzuto, a professor of finance at the University of Denver's Daniels College of Business. But as the global economy recovers, he says, this recent terror alert will create significant additional security costs and could even hurt the current financial uptick.

"Every layer of security creates additional financial burdens," Johns says."What price do we want to pay? And people have decided there's a level or risk that's acceptable. Do we need to adjust? Are we using the wrong criteria to inspect the wrong cargo at the wrong times?"

Those are the questions the industry -- and authorities -- will be working to answer in the postmortem of this latest incident.