Duluth Airport Authority Air Cargo Study

Fall 2015

Transportation and Logistics Research Center

Table of Contents

List of Tables ...... 3 1. Research Team ...... 5 2. Acknowledgements ...... 5 3. Executive Summary ...... 7 4. Introduction and Methodology ...... 9 4.1 Definitions and Industry Background Information ...... 9 4.2 Commodities and Goods Shipped by Air ...... 10 4.3 Goals for This Report...... 12 5. Methodology ...... 13 5.1 Defining Current Market Area ...... 19 5.2 Assessing the sources of current demand for airfreight in the region ...... 24 5.3 Determining future expanded airfreight service area...... 25 5.4 Evaluating the airfreight capacity of current airport infrastructure ...... 25 5.5 Estimate future demand for airfreight that could be routed through DLH ...... 25 5.6 Profile characteristics of the airport’s future airfreight customer base ...... 25 6. Research Results ...... 27 6.1 Survey of Companies in the Region ...... 27 6.2 Defining Current Market Area ...... 52 6.3 Assessing the sources of current demand for airfreight in the region ...... 53 6.4 Determining future expanded airfreight service area...... 54 6.5 Evaluating the airfreight capacity of current airport infrastructure ...... 55 6.6 Estimating future demand for airfreight that could be routed through DLH ...... 56 6.7 Comparing airfreight at DLH with population peer metropolitan areas ...... 57 6.8 Profiling characteristics of the airport’s future airfreight customer base ...... 59 7. Situation Analysis ...... 61 7.1 Customers ...... 61 7.2 Capabilities of Duluth Airport Authority and DLH ...... 65 7.3 Competition...... 65 7.3.1 Carrier competition for customers ...... 65 7.3.2 Airport competition for airfreight carriers ...... 65 7.3.3 Airport competition for customers vs. other airports ...... 66 7.3.4 Airport competition against other transportation modes ...... 66 7.4 Partners ...... 66 7.5 The Environment ...... 67 7.6 DLH Competitive Advantages ...... 67 8. Strategic Alternatives and Recommendations ...... 69 8.1 Carriers ...... 69 8.1.1 Build Passenger Traffic and Encourage Use of Mainline Aircraft ...... 69 8.1.2 Encourage Capacity Increases by Incumbent All Cargo Carriers ...... 69 8.1.3 Embrace Airfreight Trucking Model ...... 70 8.1.4 Promote DLH as Stop for Great Circle Route Air Cargo Flights ...... 70 8.2 Airfreight Users ...... 77

List of Figures

Figure 1 - Map of target zip codes for survey ...... 15 Figure 2 - Locations of firms targeted for the survey ...... 16 Figure 3 - Locations of firms targeted for survey – Twin Ports area ...... 17 Figure 4 - Firms where contact was attempted by NAICS 2 digit code groupings ...... 18 Figure 5 – Difference in driving time to DLH vs. MSP ...... 23 Figure 6 – Difference in driving time DLH vs. ORD ...... 24 Figure 7 - Results from target firm contacts ...... 28 Figure 8 - Results from target firm contacts by firm location ...... 28 Figure 9 - Results from target firm contacts by firm location – Twin Ports ...... 29 Figure 10 - Primary industries of respondent firms ...... 30 Figure 11 - Number of employees at location of respondents ...... 32 Figure 12 - Functions performed at respondent locations – percent of responses ...... 33 Figure 13 - Commodities shipped by airfreight to/from respondent firms ...... 36 Figure 14 – Average share of airfreight shipments by carrier ...... 37 Figure 15 - Airport share reported by respondents ...... 40 Figure 16 - Average weekly airfreight volume (in pounds) shipped ...... 43 Figure 17 - Average weekly number of airfreight shipments ...... 44 Figure 18 - Average value ($ per pound) of airfreight shipments ...... 45 Figure 19 - Average percent of airfreight shipments with hazardous materials ...... 46 Figure 20 - Average percent of airfreight shipments rated at dimensional weight ...... 47 Figure 21 - Average percent of airfreight shipments where firm specified routing ...... 48 Figure 22 - Impact of events on number of airfreight shipments over next 3 years ...... 51 Figure 23 – Current airfreight market area for DLH ...... 52 Figure 24 – Potential expanded airfreight service area of DLH ...... 54 Figure 25 – DLH airport diagram ...... 55 Figure 26 – Population density of area surrounding DLH ...... 61 Figure 27 – Population density of area surrounding MSP ...... 63 Figure 29 – Great circle route MXP LAX ...... 71 Figure 30 – Great circle route FRA SFO ...... 72 Figure 31 – Great circle route NRT JFK ...... 73 Figure 32 – Great circle route PVG ATL ...... 74 Figure 33 – Great circle route HKG MIA ...... 74 Figure 34 – Great circle route NRT ORD ...... 75 Figure 35 – Great circle route AMS LAX ...... 76

List of Tables

Table 1 - Methodologies used ...... 13 Table 2 - Targeted primary NAICS codes for survey ...... 14 Table 3 - Summary of survey contact attempts ...... 19 Table 4 – Competitive positions of U.S. airports surrounding DLH – passenger ...... 21 Table 5 – Competitive positions of U.S. airports surrounding DLH – all cargo ...... 22 Table 6 - Results from target firm contacts by industry (primary NAICS code) ...... 31 Table 7 - Location types of survey respondents ...... 32 Table 8 - Functions performed at respondent locations ...... 33 Table 9 - Commodities shipped by airfreight to/from respondent firms ...... 35 Table 10 - Average share of airfreight shipments by carrier ...... 37 Table 11 - Top destinations/origins of respondents’ airfreight shipments ...... 38 Table 12 - Airport share reported by respondents ...... 39 Table 13 - Seasonality of air cargo shipments (% of shipments per quarter) ...... 41 Table 14. Impact of events on number of air cargo shipments over next 3 years ...... 50 Table 15 – Industry categories of surveyed firms with greatest airfreight volume ...... 53 Table 17 – SWOT analysis for airfreight traffic at DLH ...... 61 Table 18 - International Great Circle Routes Flying Over DLH ...... 70

1. Research Team

Rick Moran Principal Investigator Kathleen Youngberg Lead Research Associate Taylor Bowerman Research Associate Daniel Kreuser Research Associate Diana Krizan Research Associate Timothy Lazar Research Associate Matthew Lindstedt Research Associate Jacob Mergen Research Associate Thomas Quinn Research Associate Sandra Benes Program Assistant

2. Acknowledgements

The advice, suggestions and other assistance from the project advisory committee provided a valuable addition to the project. Thank you to

Kate Ferguson Duluth Seaway Port Authority Brian Hanson APEX Mark Ketterer AAR Don Monaco Monaco Air

In addition to the committee, Tom Werner, Executive Director of the Duluth Airport Authority, and his staff were extremely helpful in providing information as needed in order for this research project to move forward.

3. Executive Summary

This study, commissioned by the Duluth Airport Authority, examines the current status of airfreight services at the Duluth International Airport (DLH) and the potential for future growth. The study relies on both secondary data from industry and regulatory sources, as well as primary research into the needs of businesses in the DLH market area for airfreight services. The primary research included a survey of businesses in the region designed to assess their current airfreight shipping activity and their future needs. Based on the survey and secondary research, a market area for the airport was defined.

Current airfreight activity is relatively low at most organizations in the region. The majority of the activity that is occurring is with FedEx and UPS and consists of relatively small volumes in terms of both shipments and weight. Additional airfreight activity will need to come from increased economic activity in the region based on population growth and an increase in business activity and employment.

The airfreight capacity at DLH was examined and found to be more than suitable for current activity levels. The infrastructure already in place – runways, taxiways, ramps, fixed base operator (FBO) services and local road networks – were found to be ready for additional airfreight traffic when needed. Only relatively minor issues would need to be addressed in order to expand airfreight capacity at DLH. For the longer term, the airport has plans in place for potential expansion based on large increases in airfreight volume.

The airport was found to have a number of competitive advantages over other airports in terms of airfreight services. These include runway, taxiway and ramp capacity to handle large aircraft, its status as an international airport, availability of 24-hour customs services, wide ranging services by its FBO, Monaco Air, and a 24- hour control tower. The location of DLH under many great circle routes between Asia and the eastern U.S., as well as between Europe and the west cost of the U.S. also presents an opportunity for technical or traffic stops for all-cargo aircraft.

While DLH offers a number of competitive advantages, the relatively low population density and the accompanying levels of economic activity limit the volume of airfreight generated in the region. Coupled with the existence of airports with higher existing levels of airfreight service to the west, south and east, plus the Canadian border to the north, the size of the potential service area for DLH is limited. For example Fargo (FAR) and Grand Forks (GFK) to the west respectively offer mainline passenger aircraft with capacity for airfreight and a mainline all cargo aircraft operated by FedEx to its hub. The availability of these services limits the reach of the market area for DLH even if additional service were added. Similarly, with Minneapolis-St. Paul (MSP) to the south and a complex of airports in east

central Wisconsin, notably Appleton (ATW) with mainline service by FedEx to its hub, the eastward reach of the market area for DLH is limited.

While DLH is well positioned and ready to expand airfreight services with existing infrastructure, the issue is the demand for airfreight services in the Twin Ports and the region is already being met by the service provided by FedEx and UPS at DLH. Growth will need to come from new and expanded business operations in the region, an economic development issue.

4. Introduction and Methodology

4.1 Definitions and Industry Background Information

The dictionary definition of air cargo is simply “goods shipped by aircraft.” In practice the terms air freight, airfreight, and air cargo are generally used interchangeably. The operational realities in the industry make a more specific definition air cargo and its synonyms useful. For the purposes of this project, we will use a working definition of air cargo, air freight or airfreight as “Goods shipped under an air waybill (airbill) whether the goods are transported by air, truck or other means.”

Airbills are the primary shipping documents for the air freight industry and are analogous to shipping documents used for truck, rail or marine shipping. Airbills can be issued by a direct air carrier (airline) or an indirect air carrier (air freight forwarder.) Direct air carriers own/lease and operate the aircraft used for transportation. Even though a direct air carrier may operate aircraft between an origin and destination, they sometimes choose to move freight using other means, typically via truck for short to medium distances. Indirect air carriers generally do not own or operate aircraft, but instead accept freight for transportation and then use direct air carriers, trucking firms specializing in the movement of airfreight or other means to actually move the freight. There are also firms that may operate or charter aircraft in some markets, while acting as an indirect air carrier in other markets.

For the purposes of examining the air cargo industry, direct air carriers can be classified into three broad categories: combination carriers, all cargo carriers and integrated carriers. Combination carriers derive the majority of their revenue from transporting passengers. They offer air cargo services to supplement their passenger revenue, carrying air cargo on their passenger flights, usually in the belly of the aircraft alongside checked luggage. In cases where flights are full, passenger baggage receives priority loading over airfreight shipments. In some cases combination carriers may also operate all cargo aircraft on a few routes where demand is sufficient.

Large combination carriers also contract with regional airlines to operate flights in some markets using smaller regional aircraft. For example, both Delta and United use this arrangement to serve DLH. Delta also uses its own larger aircraft to serve DLH during heavy demand periods. The service by regional airlines operating under Delta’s and United’s brands present an important distinction when it comes to airfreight: Neither carrier accepts airfreight shipments on flights operated by regional airline partners.

Combination carriers also offer a hybrid service generally referred to as expedited, small package or express shipments. Brand name examples include American Priority Parcel Service, Delta Dash, Southwest Next Flight Guaranteed and United QuickPak. Unlike airfreight shipments flown by combination carriers, these express shipments are treated like passenger baggage. Shipments are generally accepted only at the baggage counter at the origin airport and can be claimed in the baggage arrival area the destination airport. Each shipment is limited a maximum weight of 100 pounds and maximum dimensions

(L+W+D) of 90 inches in most cases. As long the shipment is tendered to the baggage counter prior to the cut off time for passenger baggage (usually 60 minutes before departure) it is guaranteed to be on the flight. In most cases express shipments are accepted on flights operated by regional airline partners.

Traditional all cargo carriers are dedicated solely to transporting airfreight via all cargo aircraft (freighters) plus supplementary truck transportation to serve some markets. These carriers are focused only on airfreight customers, as opposed to combination carriers where the primary focus is the transportation of passengers. That means cargo carriers often provide schedules better suited to airfreight customers, but they also serve much more limited route systems than combination carriers, which can afford to serve markets that cannot support all cargo service.

Both combination and traditional all cargo carriers are focused on moving airfreight from airport to airport. Integrated carriers, sometimes called express carriers, focus on moving shipments door-to-door while providing excellent information on the status of shipments to customers. The major integrated carriers in the U.S. (serving both domestic and international destinations) are FedEx and UPS. DHL offers similar services on an international basis. In the domestic market both FedEx and UPS offer guaranteed overnight (often next morning) service in the majority of markets. They operate airlines with extensive all cargo hub and spoke systems, scheduled to provide overnight airport- to-airport service. They also operate their own fleets of trucks for pickup and delivery, plus a network of airport and off airport facilities where shipments can be tendered or picked up. They offer services friendly to small businesses and individuals as well as the larger shippers. The formula has worked well for them. Boeing’s World Air Cargo Forecast 2014-15 reported the U.S. market share in revenue ton kilometers (RTKs) of express carriers like FedEx and UPS as 62.3% in 2013.

4.2 Commodities and Goods Shipped by Air

The reality is that, pound for pound, it costs more to ship commodities and goods by air. The reason is rooted in basic physics. It costs more in fuel, equipment and other expenses to overcome gravity and fly something through he air at about 500 mile per hour than it does to remain subject to the law of gravity and move on the surface of the earth at much slower speeds.

Commodities and goods shipped by airfreight vary widely, but there are some common traits. One or more of the following traits of a commodity increase the likelihood that it would be economically desirable or feasible for the commodity to be routed via air rather than surface transportation.  High value in relation to weight  Urgent need for the commodity at the destination  Need for a high degree of certainty about the arrival date and time for the commodity

Commodities or goods that have a high value in relation to their weight are particularly suited economically for air transportation because the additional cost of air transportation, as a percentage of the value of the product being shipped, is relatively low. Consider a shipment of 100 circuit boards, each of which weighs 8 ounces and has a value of $1,000. The total weight of the shipment is 50 pounds and the total value is $100,000. If air transportation cost an additional $2 per pound over surface freight, the 50 pounds of circuit boards would cost an additional $100 to ship by air. That is just 0.1% of the value of the circuit boards. If a similar situation is considered for small plastic parts each weighing the same as a circuit board, but worth only $1 each, the total value of the shipment would be $100 and the additional air shipping cost would be 100% of the value of the parts. A 0.1% increase in the delivered cost of the circuit boards is much more acceptable than a doubling of the received cost of the parts ($1 each for the product plus $1 extra shipping costs for air versus surface transportation.) In fact the received price including air transportation for the plastic parts might exceed the selling cost of the parts at the destination, insuring the recipient would lose money on each part received by air.

But what if those plastic parts are needed to keep production going at a factory producing machines worth $1 million each with a 50% profit margin? In a situation like that where the lost profits from a shut down would be very large, the extra $100 in air freight charges is a small price to pay for keeping production going.

Reliability is also often important. To emphasize reliability, a successful Federal Express (now FedEx) advertising campaign from the early 1980’s, used the tag line “When it absolutely, positively has to be there overnight.” Air transportation is an excellent choice if there is an economic cost when something does not arrive as promised and when needed. For example, if legal documents for a major business transaction don't arrive by the expected date and time, the economic disruption could be very large. Similarly, if a company is operating on a just-in-time production model it must be able to depend on reliable delivery of the needed parts and raw materials to be sure its production is not disrupted. In the latter case the company would be saving money on inventory carrying costs by having minimal inventory on hand, justifying the higher transportation cost on some of its raw material needs.

In the end, the decision to pay a premium for air transportation is based on a combination of the three factors outlined above. If the value delivered by the faster, more reliable air transportation provides sufficient value to the shipper and/or receiver, airfreight is the smart choice.

Beyond these basic economic factors, there may be operational limitations. For example, it may be difficult or impossible to ship hazardous materials by air. Also, very large products might not fit into aircraft serving a route. The latter is less of a problem for all cargo aircraft, but does come up from time to time with narrow-bodied combination aircraft.

4.3 Goals for This Report

The Duluth Airport Authority (DAA) is responsible for, among many things, the operation of the Duluth International Airport (DLH.) Goals for DLH include encouraging airline service at a level that meets the needs of the surrounding region and also making the most efficient use of the investment made in the airport’s infrastructure and operating expenses.

With respect to airline operations, the primary focus for DLH has been on passenger service. This report was commissioned by DAA to examine the potential for expanded air cargo traffic at DLH with the goals of providing the level of air cargo service needed by the business community in the region, making the area more attractive for new businesses or the expansion of existing firms, and providing an additional return on the investment in infrastructure made at DLH for the airport’s other missions.

The primary goals for the report include: 1. Defining a current market area for DLH airfreight service 2. Assessing the sources of current demand for airfreight service in the region 3. Determining future expanded airfreight service areas 4. Evaluating the airfreight capacity of current airport infrastructure 5. Estimate future demand for airfreight that could be routed through DLH 6. Profile characteristics of the airport’s future airfreight customer base

5. Methodology

Several different methodologies have been used to pursue the report’s goals. They are summarized in Table 1 and described in the following sections.

Table 1 - Methodologies used

Goal Description Methodology 1 Defining a current market area for  Survey of companies in region DLH airfreight service  Analysis of DOT airfreight data

2 Assessing the sources of current  Survey of companies in region demand for airfreight service in the region

3 Determining future expanded  Survey of companies in region airfreight service area  Analysis of DOT airfreight data

4 Evaluating the airfreight capacity of  Interviews current airport infrastructure  Secondary research

5 Estimate future demand for  Survey of companies in region airfreight that could be routed  Analysis of DOT airfreight data through DLH  Model based on comparisons of other market areas 6 Profile characteristics of the airport’s  Survey of companies in region future airfreight customer base  Analysis of DOT airfreight data  Secondary research

Primary research was conducted for the project. A survey of firms in the Twin Ports metropolitan area and the portions of northern Minnesota and Wisconsin where use of DLH for airfreight would be a reasonable alternative was conducted during May through August of 2015. The list of target companies was drawn from two primary sources:  A commercial database of companies (Reference USA database of U.S. businesses)  The membership list of APEX, an economic develop organization in the Twin Ports In the case of the commercial database, company locations were selected when three criteria were met:  Primary NAICS code for industries most likely to use airfreight based on DOT survey of commodity shipments  At least 50 employees at the location  The location was within the targeted zip codes in northern Minnesota and Wisconsin The entire APEX list was added to the target list regardless of NAICS or number of employees.

Table 2 - Targeted primary NAICS codes for survey

NAICS Code Description 21XX Mining, Quarrying, and Oil and Gas Extraction

31XX Manufacturing (food, beverage and tobacco products, textiles, apparel, leather and allied products, footwear)

32XX Manufacturing (wood products, paper, printing, petroleum and coal products, chemicals, pharmaceuticals, paint, soap, plastics, rubber, other nonmetallic mineral products)

33XX Manufacturing (primary metal manufacturing, fabricated metal products, machinery, computer/electronic products, electrical equipment and components, appliances, transportation equipment, furniture and related products, medical equipment, jewelry, toys, sporting goods, other misc. products)

42XX Wholesale trade

4452 Specialty food stores

4531 Florists

4541 Electronic shopping and mail-order houses

4931 Warehousing and storage

51XX Information (publishing, software, videos, motion pictures and music, radio and TV broadcasting, cable and subscription programming, telecommunications, data processing, other information services)

5413 Architectural, engineering and related services

5415 Computer systems design and related services

5417 Scientific research and development

55XX Management of companies and enterprises (corporate, subsidiary and regional managing offices, included holding companies)

5619 Other support services (packaging, labeling, convention/trade show organizers, other support services)

8112 Electronic and precision equipment repair and maintenance

8113 Commercial and industrial machinery and equipment

Note. XX in a 4-character code means all 4-digit codes starting with the same 2-digit code are included. Codes selected for air shipment volume based on DOT RITA 2007 Commodity Flow Survey, Table 13.

Larger locations, those with 250 or more employees, were added to the target list regardless of their NAICS code. A test of smaller firms (20 to 49 employees) was conducted, but they were much more likely to be nonusers of airfreight – even FedEx or UPS. A much smaller portion of small firms indicated they had airfreight and those that did often had limited knowledge of their own shipping practices and airfreight in general. Based on the test results, the focus remained on locations with 50 or more employees.

Figure 1 - Map of target zip codes for survey

The targeted zip codes are listed in Appendix A and mapped in Figure 1. The locations of the firms targeted for the survey by number of employees are shown in Figures 2 and 3, where Figure 3 provides a detailed look at the Twin Ports area. A summary of the firms where contact was attempted, by two digit NAICS codes, is shown in Figure 4.

Figure 2 - Locations of firms targeted for the survey

The locations of firms targeted for the survey are illustrated with the size of the company location (measured by number of employees at that location) denoted by the color of each symbol. This illustrates the distribution of large and smaller employers most likely to have airfreight.

Figure 3 - Locations of firms targeted for survey – Twin Ports area

The locations of firms in the Twin Ports area targeted for the survey are illustrated with the size of the company location (measured by number of employees at that location) denoted by the color of each symbol. This illustrates the distribution of large and smaller employers most likely to have airfreight.

Figure 4 - Firms where contact was attempted by NAICS 2 digit code groupings

Note. NAICS two digit code groupings: 20-29 Mining, utilities, construction; 30-39 Manufacturing; 40-49 Wholesale/retail trade, transportation and warehousing; 50-59 Information, finance, insurance, real estate rental/leasing, professional/scientific/ technical services, management of companies and enterprises, administrative, support, waste management; 60-69 Educational services, health care, social assistance; 70-79 Arts, entertainment, recreation, accommodation, food services; 80-89 Other services except public administration; 90-99 Public administration

Each targeted firm was contacted and a decision maker with knowledge of the firm’s airfreight needs was sought out. Once a knowledgeable individual was found, they were asked to take a 10 to 15 minute survey on their firm’s airfreight needs. In many cases the person responsible for shipping or logistics responded that the firm did not use airfreight. In those cases the definition of airfreight was reviewed with the respondent since many did not consider FedEx or UPS express shipments to be airfreight. If they confirmed that they did not use airfreight, including FedEx or UPS, the company was coded as having no airfreight (NAF) and the interview was terminated. If they did use airfreight (including those using only FedEx or UPS express shipping) the survey proceeded. The researchers used an automated survey tool during each interview of a firm that acknowledged using airfreight, recording responses in that system.

A record of attempts, firms who declined to participate, records with disconnected phone numbers and other reasons for not making further attempts to call the firm were all logged. Unless there were unusual circumstances, three attempts were made at firms to secure an interview. Attempts were discontinued after the third failed attempt. A summary of these data on attempted survey is shown in Table 3.

Table 3 - Summary of survey contact attempts

Result Count % of Total Declined to participate 22 6%

Disconnected phone or other issues 28 8%

Contact discontinued after 3 attempts 85 25%

Company did not use airfreight 152 44%

Survey completed 55 16%

Total 342 100% Note. Percentages do not add to 100% due to rounding.

A summary of the survey results is contained in section 6.1. Brief summaries of the research used for each of the six goals are provided in sections 5.1 through 5.6.

5.1 Defining Current Market Area

Three methodologies were used to research airfreight demand in the area served by DLH.

First, a geographic area in which DLH could be competitive was established. This area was determined primarily based on driving time between points in northern Minnesota and Wisconsin on one hand and DLH, MSP and ORD on the other hand. While there are other airports in the area, most would not be competitive as currently configured with MSP or ORD, nor with a DLH with added airfreight capacity.

Table 3 summarizes the competitive positions of selected airports in the region with respect to passenger service. Table 4 presents similar information in regards to all cargo service.

Figure 5 illustrates the driving time differentials between DLH and MSP from points where either airport would be a reasonable choice. Figure 6 does the same for differentials between DLH and ORD. Together these results outline the most likely limits of the market area for DLH to the south and east. Similar limits clearly exist to the west where points in central and western Minnesota have easy access to MSP via

Interstate 94 and also are relatively close to FAR and GFK. In northwestern Minnesota the proximity to FAR and GFK also limit the potential for DLH. To the north, the Canadian border limits the market area due to customs issues. Currently these boundaries are optimistic in view of the extensive airfreight options at MSP and ORD (and to a lesser degree ATW, FAR, GFK, MKE and MSN) plus relatively limited capacity at DLH. The boundaries would become more realistic with the addition of airfreight capacity at DLH through additional air service and/or a trucking hub model.

Using a second methodology, data were drawn from the survey of companies in the region conducted to determine their airfreight needs and how they were currently routing airfreight. The geographic boundaries of the survey were based on the geographic analysis detailed above.

The third methodology made use of data from the U.S. Department of Transportation Research and Innovative Technology Administration (DOT RITA) to define the current market area for DLH airfreight and assess the current demand for airfreight services in the region.

Table 4 – Competitive positions of U.S. airports surrounding DLH – passenger

Total Mfg Population Employees Employees AA DL UA Other Pax Carriers City State Airport County (000) (000) (000) Flights Destinations Flights Destinations Flights Destinations Flights Destinations Houghton MI CMX Houghton 38.7 11.6 0.7 2 ORD (SKW) Marquette MI SAW Marquette 67.7 26.9 0.9 1 ORD (ENY) 2 DTW (FLG) Bemidji MN BJI Beltrami 45.7 18.8 1.1 2 MSP (SKW) Brainerd MN BRD Crow Wing 91.8 28.2 2.5 2 MSP (SKW) Duluth-Superior MN DLH St. Louis - 2 80.2 1 25.3 7.3 Douglas Grand Rapids MN GPZ Itasca 11.1 16.0 1.0 Thief River Falls MN TVF Pennington 8.7 10.3 1.2 2 GLA: MSP Fargo-Moorhead ND FAR Cass - Clay 2 28.3 1 32.1 10.3 4 3 ORD (ENY) - 1 DFW7 (EMNSYP} (4 DL, 2 ASQ, 5 ORD (ENY) - DEN 1 SKW) (SKW) Grand Forks ND GFK Grand Forks 1 01.8 53.0 3.8 6 MSP (3 SKW, 3 FLG)

Appleton-Oshkosh WI ATW Outgamie - 2 31.5 1 16.5 23.4 8 MSP (2 SKW, 1 FLG, 5 ORD (2 ASQ, 3 Winnebago 1 TCF) - DTW (2 SKW) FLG, 2 SKW) Eau Claire WI EAU Eau Claire 1 65.0 84.3 5.2 2 ORD (ASQ) Green Bay WI GRB Brown 3 14.5 1 64.4 29.2 4 ORD (ENY) 3 DTW (1 DL, 2 ASQ) 5 ORD (3 ASQ, 2 SKW) Rhinelander WI RHI Oneida 7.5 16.6 15.3 2 MSP (SKW) Wausau-Stevens Point- WI CWA Marathon 1 35.8 1 49.3 33.4 3 ORD (ENY) 6 2 MSP (FLG) - 2 2 ORD (ASQ) Wisconsin Rapids DTW (FLG)

Code Partner(s) Name/Information Regional Airline ASQ AA, DL, UA ExpressJet (subsidiary of SKW) codes and information ENY AA Envoy (subsidiary of AA) FLG DL Endeavor Air (subsidiary of DL) GLA Great Lakes Airlines SKW AA, DL, UA Skywest TCF DL, UA Shuttle America WIS AA Air Wisconsin

See notes for table 4.

Table 5 – Competitive positions of U.S. airports surrounding DLH – all cargo

Nonfarm Mfg FX UP Other Cargo carriers City State Airport County Population Employees Employees Flights Destinations Flights Destinations Flights Destinations Houghton MI CMX Houghton 38.7 11.6 0.7 1 MKE (IRO) 1 AMF: SAW/LAN Marquette MI SAW Marquette 67.7 26.9 0.9 1 MKE (IRO) 3 AMF: LAN, CMX - IRP: RHI Bemidji MN BJI Beltrami 45.7 18.8 1.1 1 MSP (IRO) 1 MSP (BMJ) Brainerd MN BRD Crow Wing 91.8 28.2 2.5 1 MSP (BMJ) Duluth-Superior MN DLH St. Louis - 2 80.2 1 25.3 7.3 1 MSP (MTN) 1 MSP (BMJ) Douglas Grand Rapids MN GPZ Itasca 11.1 16.0 1.0 2 MSP (BMJ), INL (BMJ) Thief River Falls MN TVF Pennington 8.7 10.3 1.2 1 MSP (BMJ) 3 IFL: MEM, SDF - DKT: MSP Fargo-Moorhead ND FAR Cass - Clay 2 28.3 1 32.1 10.3 2 AIP: FSD Grand Forks ND GFK Grand Forks 1 01.8 53.0 3.8 3 MEM, MOT (MTN) Appleton/Oshkosh WI ATW Outgamie - 2 31.5 1 16.5 23.4 1 MKE/MEM Winnebago (FX) Eau Claire WI EAU Eau Claire 1 65.0 84.3 5.2 Green Bay WI GRB Brown 3 14.5 1 64.4 29.2 1 FRG: MKE Rhinelander WI RHI Oneida 7.5 16.6 15.3 2 MKE (IRO) 1 FRG: STE/MKE Wausau WI CWA Marathon 1 35.8 1 49.3 33.4 1 MKE (IRO) 2 FRG: MKE - FRG: OSH/MKE

Code Partner(s) Name/Information Regional Airline AMF Ameriflight codes and information BMJ 5X Bemidji Aviation (All cargo) DKT Encore Air Cargo FRG Freight Runners Express IFL Charters IFL Group - Charter operator IRO FX CSA Air Inc. (owned by Air T Inc.) MTN FX Mountain Air Cargo (owned by Air T Inc.) WIS Charters Proaire Cargo and Consulting, Neenah, WI (Part 135 operator - small aircraft charters)

Notes: All population numbers are US Census Bureau estimates for the respective metropolitan area or micropolitan area fro 2014 based on the 2010 census. Exceptions: Populations for Grand Rapids & Thief River Falls, MN plus Rhinelander, WI are based on county population. They are too small to be consider micropolitan areas by the census bureau. Employment data are from are from BLS Quarterly Census of Employment and Wages (March 2015) for MSAs. BLS Quarterly data by county (2014) were used for towns outside MSAs.

Figure 5 – Difference in driving time to DLH vs. MSP

Difference in driving time to DLH vs. MSP in minutes from towns with populations of 1,000 or more in potential service area of DLH. Example: Dark green is more than 120 minutes closer to DLH than MSP.

Figure 6 – Difference in driving time DLH vs. ORD

Difference in driving time to DLH vs. ORD in minutes from towns with populations of 1,000 or more in potential service area of DLH. Example: Dark green is more than 300 minutes closer to DLH than ORD.

5.2 Assessing the sources of current demand for airfreight in the region

Assessing sources of current demand relied primarily on the survey of area companies conducted. Secondary data with sufficient granularity do not appear to be available. DOT and Census Bureau data sets do not list specific firms. In cases where a firm might be identified from the data itself, for example a single large firm within a county, DOT or the Census Bureau includes the data in summaries, but do not publish data at the geographic level that would permit identification of the firm.

5.3 Determining future expanded airfreight service area

Projections for the future airfreight service area for DLH were developed based on the regional airfreight survey of companies, and an analysis of DOT airfreight data in relation to demographic and economic activity data for the region. While the FAA publishes data on airfreight, those were not useful in this study since they are limited to volume (by weight) of freight moved on all cargo aircraft at large airports. The FAA data are collected primarily for airport infrastructure funding purposes.

5.4 Evaluating the airfreight capacity of current airport infrastructure

An evaluation of the current airfreight capacity of DLH airport infrastructure was developed through interviews and secondary research into capacity and issues related to airfreight handling experienced at other airports.

5.5 Estimate future demand for airfreight that could be routed through DLH

Future demand for airfreight services through DLH was estimated based on data gathered from surveys, an analysis of DOT passenger and airfreight data and a demand model based on these data and experiences at other similarly sized airports.

5.6 Profile characteristics of the airport’s future airfreight customer base

A profile of the characteristics of the future airfreight customer base for DLH was developed using the regional survey, and analysis of DOT data together with other secondary research.

6. Research Results

The results of the primary research conducted are discussed in the following sections. The results of the survey of airfreight users are examined in section 6.1. The survey data are used in in developing conclusions for all goals except goal 5. Results from other sources are discussed for each goal in sections 6.2 through 6.7.

6.1 Survey of Companies in the Region

A total of 342 firms were targeted for interviews on their airfreight needs, with the results summarized in Figure 7. There were a total of 599 attempted calls, yielding 152 firms that claimed not to use air freight at all and 55 firms who participated in a survey of their air freight needs. Of the remaining firms, 22 (6%) declined to participate and another 8 (2%) had disconnected phone numbers. There were 20 firms (6%) eliminated after additional information was gathered. In most cases these were additional locations of a single firm or involved situations where inclusion could have biased the results. Attempts to contact 85 (25%) of the firms were abandoned after three or more tries to find someone who would participate. These were generally cases of unreturned messages or other indications of no interest in participating short of directly declining to participate.

Figure 8 illustrates the locations of the firms contacted as well as the result of each contact. Figure 9 provides similar information for an enlarged view of the Twin Ports.

Figure 10 illustrates the breakdown of the respondent firms by industry, based on NAICS codes.

Figure 7 - Results from target firm contacts

Declined 6% Disconnected 2% Eliminated 6% Survey done 16%

Stopped after 3+ calls No air freight 25% 45%

Figure 8 - Results from target firm contacts by firm location

Figure 9 - Results from target firm contacts by firm location – Twin Ports

Figure 10 - Primary industries of respondent firms

Other Services (except Public Administra on Mining, U li es Public Administra on 5% and Construc on 4% 5% Arts, Entertainment and Recrea on 2%

Educa onal Services, Health Care and Social Assistance Manufacturing 13% 27%

Professional, Scien fic and Technical Services 13%

Informa on, Wholesale, Retail, Finance, Transporta on and Insurance and Warehousing Real Estate 16% 15%

Note. Based on primary NAICS codes of firms from Reference USA.

Table 6 - Results from target firm contacts by industry (primary NAICS code)

Survey NAICS done NAF Declined Stop Disconnected DNC Total 20-29 3 7 1 4 - 3 18 30-39 17 45 7 26 6 3 104 40-49 7 30 4 21 2 8 72 50-59 15 45 3 13 - 3 79 60-69 7 7 5 13 - 1 33 70-79 1 9 2 6 - - 18 80-89 2 3 - 2 - - 7 90-99 3 6 - - - 2 11 Totals 55 152 22 85 8 20 342 Note.

NAICS two digit code groupings: 20-29 Mining, utilities, construction; 30-39 Manufacturing; 40-49 Wholesale/retail trade, transportation and warehousing; 50-59 Information, finance, insurance, real estate rental/leasing, professional/scientific/ technical services, management of companies and enterprises, administrative, support, waste management; 60-69 Educational services, health care, social assistance; 70-79 Arts, entertainment, recreation, accommodation, food services; 80-89 Other services except public administration; 90-99 Public administration

Result categories: NAF – Respondent said firm did not use airfreight (survey not administered) Declined – Respondent reused to participate in survey Stop – Survey calls stopped after 3 or more attempts Disconnected – Phone number on source list was disconnected DNC – Did not contact, usually due to list issues

See Appendix B for detail by 6 digit NAICS code.

Data drawn from the surveys with firms that acknowledged having airfreight traffic are shown starting here in a back and light yellow format. These tables summarize survey responses from the sample of firms surveyed (n=55.) Table 7 summarizes the types of locations surveyed, based on classifications for the firms in the Reference USA database.

The number of employees at each location according to Reference USA was recorded and is summarized in Figure 11. These numbers reflect the employees at the location surveyed, not an entire company, except in the case of single location firms.

Table 7 - Location types of survey respondents

Location Type Response %

Single Location 16 29%

Branch 15 27%

Subsidiary 3 5%

Headquarters 20 36%

Other 1 2% Total 55 100% Note. Single location respondents have only one location where they do business. Branch locations are non-headquarters locations operated by the firm. (Examples: individual store in retail chain, office of accounting firm that operates out of multiple locations, etc.) A subsidiary is a company owned by another company, often operating semi autonomously. Headquarters locations house the management team and headquarters functions for a company. Those labeled “Other” are locations that do not fit any of the other definitions.

Figure 11 - Number of employees at location of respondents

As companies were surveyed, data were gathered on the activities performed at surveyed locations. Multiple responses were permitted since many firms have multiple functions at the same location. For example a manufacturer might have its headquarters function collocated with its factory. As Table 8 illustrates, office/administrative was the most prevalent primary function performed at the surveyed locations, followed by “other” and then manufacturing. Only a few respondents named a secondary function(s), apparently preferring to count multiple functions as primary. Of those that did name secondary functions, office/administrative and warehousing/distribution were the most popular choices. Figure 12 shows the same data in terms of percent of responses.

Table 8 - Functions performed at respondent locations

Question Mfg. Assembly Warehousing/ Maint. Retail Office/ Other Total Distribution Admin. Primary 12 4 0 4 5 22 19 66 function Secondary 1 0 3 0 0 5 1 10 function

Note. Multiple responses for both primary and secondary functions allowed.

Figure 12 - Functions performed at respondent locations – percent of responses

Note. Total for primary function adds to more than 100% due to multiple responses. For example 40% of responses for the primary function were Office/Administrative, rather than Office/Administrative being chosen by 40% of respondents. The same applies to the secondary function responses.

Respondents were asked about the types of materials they shipped and received via airfreight. Table 9 summarizes the responses for both inbound and outbound shipments. For example 29 of the firms reported shipping outbound documents via airfreight, while 27 firms reported receiving documents via airfreight within the past month. Nine firms reported shipping machinery by airfreight, while 12 reported receiving machinery via airfreight. Figure 13 displays the same data in terms of percentage of mentions of outbound commodities and also percentage of mentions of inbound commodities. For example, there were 70 mentions of outbound commodities in Table 9. Documents were mentioned 29 times, so 41% of the mentions for outbound airfreight were for the commodity documents.

The data show that more than a third of airfreight shipments involve documents, as opposed to traditional airfreight commodities. Based on conversations with representatives responding for their firms, it appears the majority of these document shipments are routed on FedEx and UPS express services using envelope or letter pricing. The remaining two thirds of shipments are spread across traditional airfreight commodities with high value to weight ratios as well as shipments involving emergency breakdowns and stock outs. These shipments appear to be routed via direct and indirect air carriers, as well as with the integrated carriers (primarily FedEx and UPS.)

Table 10 displays the market share of carriers (on a percentage of shipments basis), showing FedEx with over 46% share of shipments, while UPS has a share of over 40% of shipments. These market shares are based on responses from the survey of the target firms’ airfreight shipping habits. They include only airfreight shipments. FedEx Ground or regular UPS service is not included. Figure 14 displays these same data graphically, making it clear how large a portion of the airfreight market is controlled by the integrated carriers. If DHL’s share is included, the integrated carriers control 88.2% of the airfreight shipments involving the surveyed firms/locations.

This dominant share of the market held by the integrated carriers is consistent with what is happening on a national level in the U.S. Boeing’s World Air Cargo Forecast for 2014-15 reported the market share of express (integrated) carriers in the U.S. was reported as 62.3% in 2013. The 62.3% market share is based on revenue ton kilometers (RTKs), as opposed to the 86% share of shipments for FedEx and UPS among surveyed firms. The larger shipments handled on charter flights and via traditional scheduled airfreight between points in the U.S. could account for the difference between shares measured in RTKs and shipments. In any event, it is clear that integrated carriers like FedEx and UPS are the dominant players in the U.S. airfreight market.

Table 11 captures the most common origins and destinations for airfreight shipments to/from the firms responding to the survey. The table makes it clear that shippers in the Duluth market area have very little international volume relative to the total number of shipments. While shipments are sent and received throughout the U.S., even the domestic market is relatively local, with the largest number of shipments from or to points in the Midwest.

Table 9 - Commodities shipped by airfreight to/from respondent firms

Question Outbound Inbound Total Responses 00 Documents 29 27 56 01 Live animals and fish 0 0 0 02 Cereal grains 0 0 0 03 Other agricultural products including 0 0 0 fresh cut flowers 03910 Fresh cut flowers 0 0 0 04 Animal feed and products of animal 0 0 0 origin, NEC 05 Meat, fish, seafood, and their 0 0 0 preparations 06 Milled grain products and preparations 0 0 0 and bakery products 07 Other prepared foodstuffs and fats and 0 0 0 oils 08 Alcoholic beverages 0 0 0 09 Tobacco products 0 0 0 21 Pharmaceutical products 0 0 0 23 Chemical products and preparations, 0 0 0 NEC 24 Plastics and rubber 0 1 1 26 Wood products 0 0 0 28 Paper or paperboard articles 5 5 10 29 Printed products 2 2 4 30 Textiles, leather, and articles of textiles 0 0 0 or leather 31 nonmetallic mineral products 1 0 1 32 Base metal in primary or semifinished 2 2 4 forms, and in finished basic shapes 33 Articles of base metal 1 1 2 34 Machinery 9 12 21 35 Electronic and other electrical 9 15 24 equipment, components, and office equipment 36 Motorized and other vehicles 1 2 3 (including parts) 38 Precision instruments and apparatus 4 7 11 39 Furniture, mattresses and mattress 0 0 0 supports, lamps, lighting 40 Misc manufactured products 6 9 15 41 Waste and scrap 0 0 0 43 Mixed freight 1 2 3 99 Commodity unknown 0 0 0

Note. Categories are based on two digit NAICS codes, except documents, which was added for this survey.

Figure 13 - Commodities shipped by airfreight to/from respondent firms

Note. Categories are based on two digit NAICS codes, except documents, which was added for this survey. “Other” category includes two digit NAICS codes listed.

Table 10 - Average share of airfreight shipments by carrier

Carrier Max % Average Share per %Share Location Delta Air Lines 0.00 0.00 DHL 25.00 1.29 FedEx 100.00 46.51 Keuhne + Nagel 0.00 0.00 Panalpina 0.00 0.00 Schenker 0.00 0.00 United Airlines 0.00 0.00 UPS 100.00 40.44 Other airline, air freight forwarder or 100.00 11.76 logistics firm

Total 100.00

Note. Other responses included: Cap Air, Logistics Planning Services, Pack and Mail Plus, Speedy Delivery (3 mentions) and Sterling Courier Service.

Figure 14 – Average share of airfreight shipments by carrier

Note. Average share of shipments by carrier for respondent locations

Table 11 - Top destinations/origins of respondents’ airfreight shipments

Destination/Origin Outbound Inbound Midwest US (ND, SD, NE, KS, MN, IA, MO, WI, IL, 34 41 MI, IN, OH) Eastern US (NY, PA, NJ, MD, DC, DE, VT, NH, MA, 15 12 RI, ME) Southern US (OK, TX, AR, LA, KY, TN, MS, AL, 16 15 WV, VA, NC, SC, GA, FL) Western US (WA, OR, CA, ID, NV, UT, AZ, MT, 15 9 WY, CO, NM) Alaska 0 0 Hawaii 0 0 Canada 4 5 Mexico 0 0 Caribbean 0 0 Central America 0 0 South America 0 1 Europe 3 3 Middle East 0 0 Africa 0 0 Asia - South (Pakistan, India, Nepal, Bangladesh) 1 1 Asia - China (including Taiwan and Hong Kong) 0 1 Asia - Korea 0 0 Asia - Japan 0 0 Asia - Southeast (Myanmar, Thailand, Laos, Viet 1 0 Nam, Cambodia, Malaysia, Singapore, Indonesia, Philippines) South Pacific (Australia, New Zealand, New 0 1 Guinea, Micronesia)

Note. Respondents were asked to name their top destinations for outbound shipments and top origins for inbound shipments. Up to three destinations and three origins were recorded for each firm.

Survey respondents were also asked about the routing of their shipments. They were asked to estimate the percentage of their inbound and outbound shipments transiting airports closest to their location. For example, if they know a shipment is trucked to MSP, then the airport used would be MSP. It was clear from interviews that many of the firms had very little knowledge of how their shipments were routed. There was a vague notion that much of their freight was trucked to larger airports, but few were sure of the routings. Many relied on the carriers’ labels to give them hints about routings. Much of this uncertainty can likely be traced back to the high market share of the integrated carriers. Their high degree of dependability means fewer shippers are worrying about routings, and have reached a point where they don't really care what the routing is as long as the shipment arrives on time.

Table 12 summarizes the airport shares reported by survey respondents northern Minnesota, Wisconsin and a portion of the upper peninsula of Michigan. About 41.9% of shipments were reported to transit DLH, while another 43.4% transited MSP as the first or last airport. Very few shippers named ORD as a routing, likely because very few FedEx or UPS airfreight shipments are routed through ORD. Most would move over MSP to the FedEx hubs in MEM or IND, or via UPS to their SDF hub. In addition, most respondents were closer to the Twin Ports area due to the distribution of population and economic activity in northern Minnesota, Wisconsin and the Michigan upper peninsula, making DLH and MSP the logical routings. Figure 15 shows these data graphically.

Table 12 - Airport share reported by respondents

Answer Max % Average % Value Value Appleton, WI (ATW) 0.00 0.00 Chicago, IL (ORD) 50.00 3.78 Duluth, MN (DLH) 100.00 41.89 Fargo, ND (FAR) 0.00 0.00 Grand Forks, ND (GFK) 0.00 0.00 Green Bay, WI (GRB) 50.00 0.91 Madison, WI (MSN) 0.00 0.00 Milwaukee, WI (MKE) 100.00 3.64 Minneapolis-St. Paul, MN (MSP) 100.00 43.42 Wausau, WI (CWA) 0.00 0.00 Truck only 100.00 3.64 Other 100.00 2.73

Note. Respondents were asked to identify airports used as either the origin for outbound shipments or the destination for inbound shipments, expressed as a percentage of their total shipments. Truck only represents air freight shipments respondents believed were trucked for entire routing.

Figure 15 - Airport share reported by respondents

Other, 2.7% Green Bay Truck only, 3.6% (GRB), 0.9% Milwaukee (MKE), 3.6% Chicago (ORD), 3.8%

Minneapolis-St Paul (MSP), 43.4%

Duluth (DLH), 41.9%

Table 13 - Seasonality of air cargo shipments (% of shipments per quarter)

Outbound Shipments Min Value Max Value Average Value January - March 10.00 30.00 24.55 April - June 25.00 35.00 25.55 July - September 10.00 35.00 25.00 October - December 15.00 40.00 24.91

Inbound Shipments Min Value Max Value Average Value January - March 10.00 30.00 24.09 April - June 25.00 40.00 25.82 July - September 10.00 40.00 25.64 October - December 10.00 40.00 24.45

Note. Respondents were asked to identify the percent of their total annual outbound shipments by quarter, and also the percent of their total annual inbound shipments by quarter.

Survey respondents were also asked about the seasonality of their airfreight needs. While individual firms had seasonal variation, the overall average for all firms surveyed showed no seasonal variations. Table 13 summarizes the results for both outbound shipments and inbound shipments. In both cases, the percentage of annual shipments in each calendar quarter was within the range of 24% to 26%, indicating no overall seasonality in shipment volume. The minimum and maximum values for the percentage of shipments per quarter for all quarters of both inbound and outbound shipments showed individual firms reporting as little as 10%, and as much as 40% of annual shipment volume. This clearly shows seasonality for shipping and receiving airfreight shipments among some of the respondent firms, even though there was no seasonality across all surveyed shippers/receivers as a whole.

More detailed questions about airfreight needs were asked of the participating firms. These included:  Average weekly airfreight volume in pounds  Average weekly number of airfreight shipments  Average value (in dollars per pound) of airfreight shipments  Average percentage of airfreight shipments including hazardous materials  Average percentage of airfreight shipments rated using dimensional weight  Average percentage of airfreight shipments where respondent firm specified the routing Figures 16 through 21 display the results of these six questions.

It is clear from the results that the surveyed firms are generally not heavy users of airfreight. Figure 16 shows about 68% of respondents reported shipping 5 pounds or less of airfreight per week. For inbound shipments, 58% of the firms reported receiving 5 pounds or less per week. Discussions with respondents showed that much of this volume was in express envelopes on FedEx or UPS, with individual shipments less than 1 pound. The trend continued with the number of shipments (as opposed to pounds) per week. Figure 17 shows that 79% of respondents reported 5 or fewer airfreight shipments per week. The same held true for shipments received – 79% of firms reported receiving 5 or fewer airfreight shipments per week.

In terms of the types of freight, survey respondents reported shipping and receiving shipments that could be described as desirable to carriers. They reported very few hazardous materials shipments, and also a very low number of light, but bulky shipments that would be rated at dimensional weight. Figure 19 that 94% of respondents reported no hazardous materials shipments outbound and 96% reported no hazardous materials shipments inbound. Of the respondents reporting some hazardous materials shipments, all reported fewer than 5% of their shipments contained hazardous material – both inbound and outbound. A similar pattern exits with dimensional weight. Figure 20 shows that 88% of firms reported no dimensional weight shipments outbound and 85% reported no dimensional weight shipments inbound. Only 8% of outbound shippers reported more than 5% of their shipments were bulky enough to be rated at dimensional weight. For inbound shipments, 11% of firms reported more than 5% of their airfreight shipments would be rated at dimensional weight.

The surveyed firms exercised less control over the routing of their shipments than might be expected. On traditional direct and indirect carriers, routing includes the direct carrier and in some cases the actual cities/airports to be used for the shipment. With integrated carriers the choice is limited to the carrier. Figure 21 shows that only 34% of firms specified the routing of their shipments all of the time, while 58% of firms never specify the routing of their outbound shipments. Specification of the routing is often the privilege of the party paying for the airfreight charges, indicating that many of the firms surveyed ship with charges to be paid by the recipient. That’s not unusual, but it does mean local shippers may have less influence than average on the various carriers. A similar dynamic plays out for inbound shipments. Only 10% of the surveyed firms reported specifying the routing on inbound shipments all of the time, while 77% reported never having input into the routing of airfreight shipments bound for the firm.

Figure 16 - Average weekly airfreight volume (in pounds) shipped

Figure 17 - Average weekly number of airfreight shipments

Note. Average number of weekly airfreight shipments outbound and inbound reported by respondent firms.

Figure 18 - Average value ($ per pound) of airfreight shipments

Note. Average value of airfreight shipments ($ per pound) from/to respondent firms

Figure 19 - Average percent of airfreight shipments with hazardous materials

Note. Percentage of shipments from/to respondent firms that included hazardous materials. Example: 94% of firms reported that none (0%) of their outbound shipments contained hazardous materials.

Figure 20 - Average percent of airfreight shipments rated at dimensional weight

Note. The average percentage of shipments from/to respondent firms that were sufficiently low density and therefore rated at dimensional rather than actual weight. Example: 88% of respondent firms reported that none (0%) of their outbound shipments were rated at dimensional weight.

Figure 21 - Average percent of airfreight shipments where firm specified routing

Note. Average percentage of airfreight shipments from/to respondent firms where respondent firm specified the routing. Example: 34% of firms reported specifying the routing 100% of the time on outbound shipments.

The respondents surveyed were asked about their opinions of how a number of events could impact the volume of airfreight shipped and received by their firms. They were asked to consider the next three-year time period and determine how each of the events listed below would impact their firm’s use of airfreight during that time. The events considered were:  The U.S. or world economy  Changes in the firm’s supply chain  Changes in products or services offered by the firm  Changes in the geographic areas to which the firm ships or from where it receives airfreight  Increases in capacity at DLH or the firm’s local airport For example, they were asked to decide which direction the economy was headed and how that would impact their firm’s airfreight shipment. Similar predictions and assessments of how the prediction would impact their airfreight shipments were solicited for the other four items.

Table 14 and Figure 22 both show that overall respondents did not expect any of the events to have any sort of impact on their firms’ airfreight needs. Table 14 shows that the mean value of the responses was between 3.06 and 3.18 for all questions, with the vast majority of respondents choosing “likely to have no impact” as their response for the questions. The 1 to 5 scale used had a midpoint of 3.0 (likely to have no impact.) It extended from 1.0 (very likely to decrease airfreight) to 5.0 (very likely to increase airfreight.)

Table 14. Impact of events on number of air cargo shipments over next 3 years

Question 1 Very likely 2 Likely to 3 Likely to 4 Likely to 5 Very likely Total Mean to decrease decrease have no increase to increase Responses impact The U.S. or world 1 3 34 11 1 50 3.16 economy

Changes in your firm's 1 1 48 3 0 53 3.00 supply chain

Changes in services or 2 1 40 6 1 50 3.06 products your firm offers

Changes in geographic 1 1 35 12 0 49 3.18 areas to which your firm ships or from which it receives air freight

Increased air freight 2 0 34 2 1 39 3.00 capacity at DLH or your local airport

Note. Opinions of respondents regarding possible impact of events on number of airfreight shipments over next 3 years

Figure 22 - Impact of events on number of airfreight shipments over next 3 years

Note. Opinions of respondents regarding possible impact of events on number of airfreight shipments over next 3 years

6.2 Defining Current Market Area

The current airfreight market area for DLH is determined primarily by geography and the available airfreight service at DLH and other airports in the region. An important part of the geographic component is the driving time between outlying areas and DLH or alternative airports with airfreight service. Based on this geography, the results of the survey of shippers and an analysis of the data on competitive airports the current market area for DLH is shown in Figure 23. Areas in northwestern Minnesota from Bemidji west that were examined appear much more likely to use airfreight service out of GFK, FAR or MSP than DLH based on the service available from those airports and the driving time. FedEx operates mainline aircraft out of GFK, and both UPS and FedEx operate regional aircraft out of cities in the area. In addition there are four mainline Delta flights per day from FAR to MSP. Finally all of these areas are in close proximity to Interstate 94, providing relatively quick access for freight being trucked to MSP. See tables 4 and 5 for a summary of airline passenger and all cargo service to airports in the region.

Similarly, to the east of DLH the upper peninsula of Michigan and areas in Wisconsin south and east of Ashland that have easy access to ATW and points south have better airfreight options going south rather than west to DLH. FedEx operates mainline aircraft to ATW, plus both UPS and FedEx offer regional carrier flights from numerous cites in east central Wisconsin. There are also truck connections to MKE and ORD.

Figure 23 – Current airfreight market area for DLH

Note. DLH market area (5 digit zip codes) shown in light green.

6.3 Assessing the sources of current demand for airfreight in the region

Based on the survey of firms in the region who reported using airfreight, fewer than 20% of the locations accounted for 96% of the combined inbound and outbound weight of shipments sent via airfreight. Note that the firms surveyed were selected based on the likelihood of their use of airfreight in order for the survey to gather the greatest amount of data on airfreight users. Even so, the vast majority of firms reported no airfreight use at all, and most of those that did had very low volumes. The largest airfreight user reported about 3,500 pounds of freight per week, total for both outbound and inbound. The second and third largest producers reported an average of 2,200 and 1,500 pounds per week respectively. The tenth largest producer reported an average of only 100 pounds per week.

Thirty percent of the top producers had 100 or more employees at the location surveyed. The smallest had only 4 employees at the surveyed location. The largest reported 700 employees. The primary industries of these locations are shown in Table 15.

Overall the current demand for airfreight in the region is small and there are very few large producers. The thin, widespread demand is concentrated in certain key industries, but because there are so few large users of airfreight, demand will continue to be difficult to forecast. The users will also be difficult to reach by anyone considering a sales effort with so little business spread over a relatively large number of firms. . Table 15 – Industry categories of surveyed firms with greatest airfreight volume

Primary two-digit Industry description Number of firms NAICS code 22 Utilities 1

32 and 33 Manufacturing 2

42 Wholesale trade 2

48 Transportation and warehousing 1

54 Professional, Scientific and Technical 3 Services

Note. Surveyed firms that accounted for 96% of airfreight volume (in pounds, both inbound and outbound.)

6.4 Determining future expanded airfreight service area

A number of things must occur before DLH will be in a position to expand its air freight service area. As outlined in section 6.2, the current airfreight service area for DLH is constrained by airports to the east and west that offer mainline service from combination carriers and/or mainline freighter service from FedEx.

The only way the airfreight service area for Duluth could expand is if more competitive airfreight capacity was available to/from Duluth. This would likely need to include both mainline combination aircraft capable of hauling airfreight on a regular basis, plus the addition of a mainline freighter from FedEx or UPS, backed by feed from a large network of delivery routes in the region.

If the additional lift from/to DLH and the supporting pickup and delivery network of one or more of the integrated carriers both happened at DLH, it is possible the airfreight service area could expand to the east and west, resulting in a footprint like that shown in Figure 24. It is also possible that additional traffic could be garnered from other airports in the region if additional lift from FedEx or UPS operated out of DLH. However, such a development would depend on convincing either FedEx or UPS that such a move would be in their best interest, a relatively daunting task.

Figure 24 – Potential expanded airfreight service area of DLH

Note. Potential expanded market area (5 digit zip codes) shown in light green.

6.5 Evaluating the airfreight capacity of current airport infrastructure

Based on discussions with DLH airport staff and independent research, it is clear that DLH has the capabilities to handle almost any all-cargo aircraft. Runway 9/27 has the length, width and load bearing capacity for cargo aircraft as large as the Boeing 747 Dreamlifter. The only cargo aircraft cargo operating today that would present an issue is the Antonov 225, a massive Russian cargo aircraft unlikely to play any significant role in regular airfreight activity in the U.S. In addition to Runway 9/27, Taxiway A is similarly able to handle almost any cargo aircraft.

Figure 25 maps the locations on the airport, illustrating the proximity of ramp areas to Taxiway A, which parallels Runway 9/27. Both Monaco Air’s ramp (marked as FBO on diagram) and the FedEx ramp (southeast of the tower near the termination of taxiway D on diagram) are centrally located.

Figure 25 – DLH airport diagram

Note. Airport diagram from www.skyvector.com

FedEx handles existing airfreight operations for an ATR regional freighter based at DLH that is operated by Mountain Air to/from MSP, while Monaco Air handles the loading and unloading for a Metroliner contracted from Bemidji Air Service by UPS for flights to MSP.

FedEx has its own loading equipment and is capable of loading larger aircraft than the ATR currently used. The FedEx ramp area could handle aircraft up to a Boeing 757. The FedEx sorting area is small and in an old building that might prove to be the limiting factor for any expansion using current facilities.

Monaco Air staff handles UPS freight with minimal equipment due to the size of the aircraft. Monaco Air has indicated its willingness to acquire additional loading equipment such as lower deck and main deck loaders capable of handling aircraft containers and pallets as needed to service larger aircraft. The ramp at Monaco Air is capable of handling aircraft up to a Boeing 747F, but there are no sorting facilities currently available. Old hangars in the ramp area might be able to serve in this capacity if needed.

Other current airport infrastructure and services include  FAA operated 24 hour control tower  Fueling service is available through Monaco Air, including Jet A fuel  Highway access to US 53 is available on two lane roads capable of handling trucks up to 53-foot tractor trailers  International airport status with 24 hour customs availability  Monaco Air is experienced handling both smaller and larger aircraft - Equipment used in serving larger aircraft currently includes auxiliary power units, air stairs, tugs, conveyors, etc.

6.6 Estimating future demand for airfreight that could be routed through DLH

Estimating future demand for airfreight from the Twin Ports area and the surrounding areas is difficult. As both the survey of airfreight needs of companies in the region and the current level of airfreight activity as evidenced by the operations of FedEx and UPS show, there is currently limited demand in the area for airfreight services. Future demand will, for the most part, depend on economic development activities in the region.

The growth in passenger travel through DLH and the growth of airfreight volume are to a large degree linked. More population and more employment generate both passenger travel and airfreight volume, although the extent of growth in both is also linked to the types of new employment generated by economic development activities and natural growth. For airfreight, growth in the industries listed in Table 15 would likely offer the greatest growth in airfreight volume. However, economic 56

development efforts should not focus solely on these industries proven to be associated with higher levels of airfreight use. Other businesses, not currently active in the region, could also generate more airfreight volume. For example facilities devoted to distribution and warehousing in almost any industry could increase airfreight volume through integrated carriers like FedEx and UPS, as well as traditional airfreight carriers.

The overall growth of air cargo in the U.S. market was 3.0% during 2012 and 2013 according the Boeing’s 2014-15 World Air Cargo Forecast. This growth is the result of the economic recovery, although the volume is still below that posted in 2007 before the market dropped along with the economy. If airfreight volume in the Twin Ports and the surrounding region grew at the rate of U.S. air cargo growth, modest growth would most likely be seen at DLH in the traffic handled by FedEx and UPS. While that would be a positive development, it would not have a significant impact on operations or revenue at DLH.

6.7 Comparing airfreight at DLH with population peer metropolitan areas

When compared with metropolitan areas of similar populations, the Duluth- Superior metropolitan area is comparable in terms of economic activity. However, when airfreight activity at DLH is compared with the airports in these similar sized metropolitan areas, the ratio of economic indicators (population, number of firms, size of payroll, etc.) for each area and versus the number of pounds of airfreight shipped through each area’s airport varies substantially.

Part of this variation is due to differences in the types of businesses operating in each area, but much of the disparity can be traced to the operational choices made by FedEx and UPS. If an airport is used as a hub gathering freight from surrounding areas, the volume of airfreight flowing through that airport is substantially larger compared to the local population and economic activity than an airport loading only local airfreight. Table 16 compares economic indicators and traffic figures for metropolitan areas similar in size to Duluth-Superior. It also notes which airports are served by FedEx and/or UPS mainline and feeder aircraft, allowing comparisons based on FedEx and/or UPS service at an airport. For example, Lubbock, TX (LBB) has a slightly smaller population than Lincoln, NE (LNK). In addition LBB is below LNK in economic activity (number of firms, establishments, employees, payroll and receipts.) However, airfreight volume from LBB was over 45 million pounds in 2014 versus slightly more than 159,000 pounds at LNK. The difference appears to be the mainline service at LBB by FedEx and the feeder service with UPS. This was driven by operating decisions by FedEx and UPS, which were likely influenced by the distances from major airports. In this example, it is 55 miles from LNK to OMA versus 282 miles from LBB to DFW.

Table 16 Airport Traffic Data for Duluth-Superior Peer Metropolitan Areas

Population Data Business and Employment Data 2000-2010 Operations 2010-2014 2014 Freight Average Ops/Year 2010-2014 Major Airport FDX UPS MSA Pop 2010 % Chg 2000 Firms Estab. Empl. Payroll ($ 000) Receipts ($ 000) Airport Air Carrier Air Taxi Total (Pounds) Air Carrier Air Taxi Total Code Distance Main Feeder Main Feeder Eugene, OR 351,715 8.9 8,249 9,455 113,062 3,953,990 21,156,696 EUG 35,605 55,441 91,046 1 ,557,267 7,121 11,088 1 8,209 PDX 106 Y Y Rockford, IL 349,431 9.1 6,415 7,418 131,028 5,304,179 31,515,506 RFD 45,464 13,139 58,603 142,194,258 9,093 2,628 1 1,721 ORD 63 Y Savannah, GA 347,611 18.6 7,089 8,400 130,191 5,022,473 32,290,271 SAV 76,441 1 10,470 1 86,911 6 ,327,752 15,288 22,094 3 7,382 ATL 214 Y Y Kalamazoo-Portage, MI 326,589 3.7 5,792 6,821 117,490 4,942,563 27,956,710 AZO 1,208 46,599 47,807 129,612 2 42 9,320 9,561 DTW 113 South Bend-Mishawaka, IN-MI 319,224 0.8 5,549 6,603 119,362 4,437,237 25,051,010 SBN 16,488 73,771 90,259 11,615,996 3,298 14,754 1 8,052 ORD 84 Y Y Spartanburg, SC 313,268 10.4 5,487 6,646 121,189 4,740,277 35,978,695 GSP 50,630 1 31,751 1 82,381 34,951,334 10,126 26,350 3 6,476 CLT 75 Y Y Kingsport-Bristol-Bristol, TN-VA 309,544 3.7 4,899 6,040 106,096 4,344,396 24,540,141 TRI 5,211 59,230 64,441 62,244 1,042 11,846 1 2,888 CLT 119 Roanoke, VA 308,707 7.1 6,769 8,117 135,512 5,212,384 27,317,968 ROA 10,793 98,613 1 09,406 13,401,085 2,159 19,723 2 1,881 IAD 177 Y Y Green Bay, WI 306,241 8.4 6,427 7,514 147,819 6,140,917 38,274,928 GRB 21,847 71,185 93,032 40,422 4,369 14,237 1 8,606 ORD 173 Y Lincoln, NE 302,157 13.3 7,137 8,378 136,275 5,027,466 31,404,924 LNK 1,486 58,016 59,502 159,818 2 97 11,603 1 1,900 OMA 55 Lubbock, TX 290,805 13.5 6,046 7,118 106,978 3,477,898 23,032,491 LBB 48,890 1 09,666 1 58,556 45,759,237 9,778 21,933 3 1,711 DFW 282 Y Y Fort Smith, AR-OK 280,467 9.8 4,985 5,982 98,244 3,265,683 18,592,522 FSM 3,530 27,997 31,527 105,882 7 06 5,599 6,305 DFW 227 Duluth, MN-WI 279,771 1.6 5,968 7,119 106,274 3 ,988,029 31,698,761 DLH 4,782 52,102 5 6,884 510,350 9 56 10,420 1 1,377 MSP 144 Y Y San Luis Obispo, CA 269,637 9.3 7,031 7,886 83,834 3,171,877 16,327,377 SBP 3,815 55,560 59,375 750,975 7 63 11,112 1 1,875 LAX 156 Y Gainesville, FL 264,275 13.7 5,300 6,051 84,137 2,933,085 14,292,652 GNV 3,252 51,144 54,396 8 ,309 6 50 10,229 1 0,879 MCO 105 Cedar Rapids, IA 257,940 8.7 5,480 6,476 123,972 5,346,927 36,316,263 CID 29,004 1 04,519 1 33,523 41,602,488 5,801 20,904 2 6,705 ORD 196 Y Y Wilmington, NC 254,884 26.6 6,731 7,679 91,119 3,431,294 18,198,555 ILM 28,641 69,519 98,160 1 ,298,654 5,728 13,904 1 9,632 CLT 185 Y Waco, TX 252,772 8.9 4,439 5,207 95,520 3,234,967 22,927,829 ACT 5,255 24,193 29,448 12,864 1,051 4,839 5,890 DFW 89 Amarillo, TX 251,933 10.2 5,244 6,106 93,910 3,557,585 26,821,624 AMA 38,866 55,516 94,382 481,140 7,773 11,103 1 8,876 DFW 312 Y Laredo, TX 250,304 29.6 4,316 4,970 70,037 1,894,001 12,030,063 LRD 22,301 48,555 70,856 26,339,316 4,460 9,711 1 4,171 SAT 150 Y Yakima, WA 243,231 9.3 4,040 4,583 62,612 2,194,429 15,205,003 YKM 9,175 20,129 29,304 1 ,819,054 1,835 4,026 5,861 SEA 103 Y Macon, GA 232,293 4.5 4,390 5,135 81,141 2,844,833 16,746,686 MCN 1,245 11,025 12,270 273 2 49 2,205 2,454 ATL 79 Tuscaloosa, AL 230,162 13.4 3,896 4,483 75,479 2,849,344 26,808,592 TCL 1,310 9,664 10,974 40,785 2 62 1,933 2,195 ATL 186 College Station-Bryan, TX 228,660 23.7 3,860 4,471 60,439 1,996,617 11,705,361 CLL 2,175 31,425 33,600 136,829 4 35 6,285 6,720 IAH 74 Y Sioux Falls, SD 228,261 22.0 6,094 7,119 126,439 4,810,101 31,474,727 FSD 35,935 1 41,227 1 77,162 38,497,778 7,187 28,245 3 5,432 MSP 196 Y Y Charleston, WV 227,078 -3.8 4,469 5,621 95,907 3,876,952 21,319,859 CRW 5,473 1 06,413 1 11,886 709,782 1,095 21,283 2 2,377 SDF 226 Y Longview, TX 214,369 10.5 4,609 5,371 83,394 3,315,914 19,385,555 GGG 2,182 26,088 28,270 13,646 4 36 5,218 5,654 DFW 140 Burlington-South Burlington, VT 211,261 6.2 5,852 6,672 96,452 4,041,162 23,383,116 BTV 63,097 75,545 1 38,642 4 ,182,609 12,619 15,109 2 7,728 BOS 181 Y Springfield, IL 210,170 4.3 4,532 5,270 84,343 3,163,769 18,529,409 SPI 1,513 34,774 36,287 549 3 03 6,955 7,257 ORD 174 Tyler, TX 209,714 20.0 4,853 5,554 86,158 3,322,712 18,340,926 TYR 2,816 36,240 39,056 1 ,286 5 63 7,248 7,811 DFW 102 Y Fargo, ND-MN 208,777 19.7 5,478 6,351 112,641 4,539,681 28,204,818 FAR 28,337 82,074 1 10,411 99,257 5,667 16,415 2 2,082 MSP 223 Y Rochester, MN 206,877 12.0 4,450 5,083 93,322 3,949,326 16,757,608 RST 1 05,558 1 49,344 2 54,902 9 ,847,136 21,112 29,869 5 0,980 MSP 76 Y Bellingham, WA 201,140 20.6 5,655 6,151 68,800 2,759,862 36,433,864 BLI 43,983 57,966 1 01,949 1 ,405,988 8,797 11,593 2 0,390 SEA 93 Y Saginaw, MI 200,169 -4.7 3,706 4,367 76,208 2,800,145 14,562,140 MBS 1,646 45,652 47,298 21,550 3 29 9,130 9,460 DTW 98 Y

The data in Table 16 have been used to construct a model showing the relationships between airfreight activity at an airport and the economic activity of the surrounding metropolitan area plus other factors. The model is discussed in Appendix G.

The model could be used as a tool for the purposes of benchmarking the performance of an airport given local economic activity or illustrating the impact expanded economic activity could have on airfreight volume at an airport.

6.8 Profiling characteristics of the airport’s future airfreight customer base

In much the same way that future demand for airfreight routed through DLH is difficult to forecast, the profile of the airport’s future airfreight customer base is also difficult to determine. It depends heavily on additions and losses of firms operating in the region, an economic development issue.

However, the economics of airfreight are unlikely to change in the foreseeable future. The physics of moving goods by air versus surface transportation are also unlikely to change. It simply costs more to move products faster by flying due to the additional energy required. These facts point to future airfreight customers conforming to the same characteristics of today’s customers:  Ship goods with high value in relation to weight ($ per pound)  Have urgent need for the goods at the destination, for example parts needed for emergency repairs.  Has a need for a high degree of certainty about the arrival date and time for the commodity. One example would be manufacturers using a just-in-time inventory strategy.

7. Situation Analysis

An overview for the situation currently faced by DLH with respect to airfreight is best accomplished through an analysis of the facility’s strengths, weaknesses, opportunities and threats. This SWOT analysis is summarized in Table 16. Sections 7.1 through 7.6 summarize additional topics relevant to a situation analysis.

Table 17 – SWOT analysis for airfreight traffic at DLH

Strengths Weaknesses  Faster turnarounds than ORD or MSP  No airfreight carried on regional airline  International airport with 24 hours partners of UA and DL customs service  Low population density and economic  24 hour control tower activity in DLH market area mean limited  Long runway natural demand for airfreight (See  Aggressive, customer service oriented Figures 26 through 28 for comparisons FBO of population density.)  Economic development activities in area  All cargo service by FedEx and UPS  Good location for regional airfreight hub

Opportunities Threats  Attracting new businesses with airfreight  Proximity to MSP and other airports with needs to the region FedEx or UPS mainline service  Attracting partner(s) to assist in building  Expansion of integrated carrier ground traditional airfreight traffic (forwarders, networks designed to feed MSP and 3PL, airfreight truckers) other airports  Technical and traffic stops for great circle route all cargo flights

7.1 Customers

Customers of airfreight carriers are primarily businesses. Based on the survey of firms in the Twin Ports market area, many do not make use of airfreight at all, and of those that do use airfreight services the majority are light users. See section 6.3 for details. Table 15 shows a number of industries with heavier airfreight users in the area.

In the case of airfreight services, like many other industries, there are multiple levels of customers. In addition to the end user purchasing airfreight services from air carriers, the carriers are customers of airports. In the case of DLH there are two primary airfreight carriers who are customers of the airport: FedEx and UPS. These customers expect the services they need from the DLH in order to run their businesses and serve the end Figure 26 – Population density of area surrounding DLH

Top: Population density (population per square mile) falls off quickly outside the immediate Twin Ports area. The boundaries shown are for zip codes.

Bottom: Population density does not increase in areas beyond the Twin Ports area. There are no outlying pockets of population density that contain industry that could generate airfreight volume that could be routed through DLH.

Figure 27 – Population density of area surrounding MSP

Population density (population per square mile) remains high for a much larger area around MSP. The boundaries shown are for zip codes.

Figure 28 – Population density of area surrounding ORD

The area of high population density (population per square mile) around ORD is massive in comparison to MSP or DLH. The boundaries shown are for zip codes.

customer who is actually shipping airfreight. Delta and United are customers of DLH for passenger services, but both have the potential to be airfreight customers as well if they operate mainline aircraft with the capacity to carry airfreight in addition to passengers and baggage. Other combination carriers that currently do not serve DLH are also potential airfreight customers. In addition, charter and scheduled international cargo carriers are also potential customers, whether for technical or traffic stops.

7.2 Capabilities of Duluth Airport Authority and DLH

The capabilities of DLH with respect to air cargo carriers are impressive. Section 6.5 discusses these capabilities in detail, but it is clear that the airport could almost immediately provide the services needed by an airfreight carrier wishing to make use of the airport.

7.3 Competition

Competition relevant to support services offered by an airport for air carriers transporting airfreight can be classified into four basic categories: competition for customers by air carriers, airport competition for air freight carriers considering offering service to/from the airport, airport competition where airports compete for traffic from market areas beyond the local communities in which each airport is located, and competition against other modes of transportation. These are discussed in sections 7.3.1 through 7.3.4.

7.3.1 Carrier competition for customers

Advertising and sales efforts by air carriers to attract and retain airfreight shippers are some of the most noticeable efforts in the industry. These business to business (B2B) marketing efforts often are simply battles for market share, but also can result in an increase in the overall market as new airfreight users respond to advertising or sales efforts.

7.3.2 Airport competition for airfreight carriers

Airfreight carriers, from FedEx or UPS to traditional scheduled and charter carriers, are looking to maximize their profits. In most cases this means making the best use of their major assets – their aircraft. As airports compete for business from airfreight carriers the best pitch is business case – why the carrier can make more money serving the area surrounding DLH versus some other airport. It can take guarantees or sweeteners for the air carrier in order to win ne air service, and it also requires that the air carrier believe that the airport has the capabilities to provide the services needed by the carrier. This process is not unlike the process an airports goes through selling a combination carriers on adding service to that airport.

7.3.3 Airport competition for customers vs. other airports

There are times when airports actively solicit the end users to use their facilities – to choose to ship/receive airfreight through that particular airport. Typically these are informative messages explaining why routing airfreight shipments through a particular airport would be advantageous for a customer or potential customer. The messages support existing air carrier customers of the airport, while attempting to build the number of customers routing shipments through the airport.

7.3.4 Airport competition against other transportation modes

Depending on the location of an airport, it may face competition against other modes of transportation for business that could have flown on an airfreight carrier from the airport. Most often this competition will be in the form of truckers who can schedule service between the airport’s market service area and another airport, connecting with airfreight service from that airport.

In some cases the truck transportation can be to/from the locations of firms shipping and receiving airfreight, and in other cases it may be offered between airports, simply substituting for flights. In either case the truck service may provide service not available via air due to a lack of scheduled air service at key times.

In other cases, the competition may be purely on an economic basis – for example the differential in cost per mile between trucking and flying freight. See Appendix C for an example of this cost differential.

7.4 Partners

In order to provide airfreight service for firms shipping and receiving airfreight, airports work with a variety of partner organizations. These include combination air carriers, integrated carriers and all cargo carriers – all of which would be customers of an airport. In addition there are a number of other organizations that can play a part in the movement of airfreight:  Airfreight forwarders are firms that receive freight shipments from shippers, combine those shipments into a larger, sometimes containerized, shipments and use air carriers or other means to ship the combined shipment to the destination airport where it is broken down and delivered to the individual consignees. The forwarder can make money and offer savings to shippers based on the differential in the cost per pound to ship lower weight shipments and the higher weight shipments consisting of the freight combined from a number of shippers. In some ways airfreight forwarders can be though of as retailers, offering improved service and pricing to smaller shippers. The rise of integrated carriers has had a negative impact on the airfreight forwarding industry, but there are some cases where forwarders continue to offer needed services to shippers. As such they continue to be good partners for airports. In some cases they may even be on airport

operations, in which case they are customers of the airport, while in other cases they may provide their service from an off airport location close to the airport.  Airfreight trucking firms provide fast service substituting for flying freight between airports. While competing for airfreight shipments with air carriers, these truckers often provide services that can enhance the service received by shippers. Generally they offer overnight service between points less than 500 miles apart, in markets where overnight service is not otherwise offered except by integrated airfreight carriers.  Third party logistics firms offer shippers the ability to outsource their logistics function and act as shipping, traffic or logistics managers for their clients for all modes of transportation. As such these firms could be working with combination air carriers, integrated airfreight carriers, all cargo carriers or any combination of other service providers.  Economic development agencies exist to attract new business to an area, help existing businesses expand or otherwise stimulate the economy in a particular area. Since any expansion in business in an airport’s market area is likely to increase traffic through the airport, they are important partners for airports.  Transportation and logistics trade associations offer a way for professionals in the transportation and logistics business to meet for networking and professional development. They offer a good way for airport professionals and others to meet with airfreight customers and partners on a regular basis. This provides a good conduit for communications with these customers, and allows airport staff to regularly take the pulse of the airfreight community.

7.5 The Environment

Airports do not operate in a vacuum. The economic health of the surrounding area, national and world economic activity, developments with individual partners or entire industries are important factors in the overall needs and growth of demand for airfreight services at an airport. Different strategies are often required depending on changes in these environmental factors. Airport managers and the managers at customers and partner firms will react in different ways to changes in the environment, and each partner needs to recognize such changes and modify plans for investment, operations and marketing as needed.

7.6 DLH Competitive Advantages

Finally, competitive advantages of airports should be recognized and incorporated into marketing and operations strategies. These competitive advantages are often listed in the strength section of a SWOT analysis, with some of the opportunities also translating to competitive advantages. In the case of DLH they include:  Faster turnarounds than ORD or MSP  International airport with 24 hours customs service  24 hour control tower

 Long runway  Aggressive, customer service oriented FBO  Economic development activities in area  All cargo service by FedEx and UPS  Good location for regional air freight hub  Well positioned to serve all cargo flights on great circle routes between Asia and the eastern U.S., and between Europe and the west cost of the U.S.

Competitive advantages can be temporary or enduring. Competitors or others can easily eliminate temporary competitive advantages. For example, if a business lowered its prices it would have a temporary competitive advantage over businesses that had not lowered their prices, but that advantage could evaporate when competitors matched the lower prices. The competitive advantages listed above for DLH are mostly ending advantages. For example, the nature of operations at ORD and MSP are unlikely to change, so the faster turnarounds at DLH are not likely to change. Similarly it would be difficult for a competitive airport not already designated as an international airport to achieve that status.

These enduring competitive advantages must be the core of sales efforts designed to increase airfreight activity at DLH.

8. Strategic Alternatives and Recommendations

8.1 Carriers

Given current circumstances, DLH could consider exploring one or more of the following four strategies in order to increase the volume of airfreight transiting the airport.

8.1.1 Build Passenger Traffic and Encourage Use of Mainline Aircraft

Both passenger and airfreight traffic are dependent to a large degree on economic activity and the connection between the two types of traffic should be recognized. Once passenger traffic reaches a tipping point with the combination carriers serving DLH and additional mainline aircraft are added in place of regional aircraft, new airfreight capacity will appear out of DLH, offering growth opportunities for airfreight traffic.

8.1.2 Encourage Capacity Increases by Incumbent All Cargo Carriers One option would be to encourage FedEx and/or UPS to increase capacity. As the dominant airfreight carriers with more then half the market between them, this would seem to have the largest potential. However, both carriers are very sophisticated in their forecasting and scheduling. They are unlikely to add capacity that is not needed to serve customer demand.

Both FedEx and UPS operate flights using regional airline partners to fly air cargo between DLH and MSP, where it is transferred to/from mainline freighters flying between MSP and the hubs operated by FedEx (MEM, IND) and UPS (SDF) providing overnight connections to points throughout their respective systems. The bulk of the air shipments on FedEx and UPS are trucked to MSP due to costs. (See Appendix C for cost comparisons between air and truck transport.) For the most part FedEx and UPS ship overnight packages on the DLH flights, while trucking second and third day packages to MSP to connect with air service to their hubs. This is not an unusual arrangement within the complex networks operated by FedEx and UPS. Many of their express shipments are being trucked for some or all of the their journeys. Given the cost differentials and the fact that both FedEx and UPS have shown they can maintain service guarantees while trucking freight between DLH and MSP, it is unlikely they would choose to fly a greater proportion of their freight in and out of DLH unless their operations strategies shifted fairly radically or the demand for airfreight in the region increased.

Assuming neither FedEx nor UPS make strategic shifts in their operations, following this path would require an increase in demand, making it dependent on an overall increase in economic activity in the region and/or a consolidation into DLH of airfreight to/from areas beyond the current DLH service area in Northeast Minnesota and Northwest Wisconsin.

8.1.3 Embrace Airfreight Trucking Model Another option would be to facilitate trucking freight to MSP or some other airport with sufficient air cargo capacity. This is already happening on a piecemeal basis. There may be an opportunity to work with a trucker on regularly scheduled service timed for air freight shipments that could consolidate some of the existing traffic and possibly create new traffic. DLH could host the terminal facility for the trucker(s). See Appendix F for an example of how this could work.

While this option would not provide the same benefits to DLH as increased aircraft operations, it would likely increase airfreight options in the area, making the region more attractive to new businesses and expansions of existing operations. It could be an interim step between the current operations and operations with sufficient volume to justify larger freighters operating at DLH.

8.1.4 Promote DLH as Stop for Great Circle Route Air Cargo Flights Another way of approaching the third option of attracting more air cargo lift to DLH could be intertwined with a strategy already being pursued by Monaco Air to attract more aircraft operations to DLH for technical stops. DLH is well-situated geographically to serve as a refueling and/or customs stop for aircraft flying between Europe and the western U.S., as well as many parts of Asia and the east cost of the U.S. See Table 17 (routes with and without DLH stop) and Figures 29-35 (maps of great circle routes with DLH) for examples.

In addition to offering a technical stop for these international cargo flights, it may be possible to promote DLH as a gateway to the Midwest for some of the freight on these flights. In particular DLH could serve as an alternative to delays at ORD in clearing customs and transshipping, but other points in the Midwest that currently rely on ORD or MSP as a gateway might find a DLH routing competitive. From the point of view of an all cargo carrier, a DLH stop offers twin advantages: quick technical stops and reduced time dealing with customs compared with larger gateways like LAX, ORD or JFK. Both would save all cargo carriers flying great circle routes near DLH time and money.

Table 18 - International Great Circle Routes Flying Over DLH

Routing Non-stop With DLH stop Difference AMS-LAX 5,578 5,668 90 NRT-ORD 6,274 6,276 2 HKG-MIA 8,990 8,993 3 PVG-ATL 7,659 7,660 1 NRT-JFK 6,745 6,893 148 FRA-SFO 5,699 5,923 224 MXP-LAX 6,039 6,100 61

Note. Distances are in statute miles with no allowance for approach and departure routings. Source: www.gcmap.com

Figure 29 – Great circle route MXP LAX

Milan (MXP) Los Angeles (LAX) 6,039 miles vs. MXP DLH LAX 6,100 miles

Figure 30 – Great circle route FRA SFO

Frankfurt (FRA) San Francisco (SFO) 5,600 miles vs. FRA DLH SFO 5,923 miles

Figure 31 – Great circle route NRT JFK

Tokyo (NRT) New York (JFK) 6.745 miles vs. NRT DLH JFK

Figure 32 – Great circle route PVG ATL

Shanghai (PVG) Atlanta (ATL) 7,659 miles vs. PVG DLH ATL 7,660 miles

Figure 33 – Great circle route HKG MIA

Hong Kong (HKG) Miami (MIA) 8,990 miles vs. HKG MIA 8,993 miles

Figure 34 – Great circle route NRT ORD

Tokyo (NRT) Chicago (ORD) 6,274 miles vs. NRT DLH ORD 6,276 miles

Figure 35 – Great circle route AMS LAX

Amsterdam (AMS) Los Angeles (LAX) 6,578 miles vs. AMS DLH LAX 5,668 miles

8.2 Airfreight Users

The most important thing an airport can do for airfreight shippers in its service area is to find a way to offer them more and varied products/choices for airfreight shipping. For DLH, this could include:  Encourage integrated carriers to expand service, particularly the addition of a mainline freighter by FedEx or UPS.  Addition of capacity on combination carriers through the introduction of mainline aircraft.  Building partnerships with airfreight trucking firm(s) and possibly adding an airfreight-trucking hub to attract airfreight from a wider area to DLH. (See Appendix F for example.) Each of these actions will be difficult to achieve. In each case there is a chicken or the egg issue – airfreight volume is needed to increase service, and additional service is needed to attract more airfreight. The best opportunity to move beyond the situation is growth of underlying demand through economic development activities.

Appendix A – Target Zip Codes for Survey

Zip Code Town/City Zip Code Town/City Zip Code Town/City Michigan Wisconson 49901 Ahmeek 54501 Rhinelander 54806 Ashland 49902 Alpha 54511 Argonne 54814 Bayfield 49903 Amasa 54512 Boulder Junction 54820 Brule 49905 Atlantic Mine 54513 Brantwood 54821 Cable 49908 Baraga 54514 Butternut 54827 Cornucopia 49910 Bergland 54515 Catawba 54832 Drummond 49911 Bessemer 54517 Clam Lake 54836 Foxboro 49912 Bruce Crossing 54519 Conover 54838 Gordon 49913 Calumet 54520 Crandon 54839 Grand View 49915 Caspian 54521 Eagle River 54844 Herbster 49916 Chassell 54524 Fifield 54846 High Bridge 49917 Copper City 54525 Gile 54847 Iron River 49918 Copper Harbor 54526 Glen Flora 54849 Lake Nebagamon 49919 Covington 54527 Glidden 54850 La Pointe 49920 Crystal Falls 54529 Harshaw 54854 Maple 49921 Dodgeville 54530 Hawkins 54855 Marengo 49922 Dollar Bay 54531 Hazelhurst 54856 Mason 49925 Ewen 54532 Heafford Junction 54864 Poplar 49927 Gaastra 54534 Hurley 54865 Port Wing 49929 Greenland 54536 Iron Belt 54873 Solon Springs 49930 Hancock 54537 Kennan 54874 South Range 49931 Houghton 54538 Lac Du Flambeau 54880 Superior 49934 Hubbell 54539 Lake Tomahawk 54891 Washburn 49935 Iron River 54540 Land O Lakes 49938 Ironwood 54541 Laona Continued on next page 49942 Kearsarge 54542 Long Lake 49945 Lake Linden 54543 Mc Naughton 49946 Lanse 54545 Manitowish Waters 49947 Marenisco 54546 Mellen 49948 Mass City 54547 Mercer 49950 Mohawk 54548 Minocqua 49952 Nisula 54550 Montreal 49953 Ontonagon 54552 Park Falls 49955 Painesdale 54554 Phelps 49958 Pelkie 54555 Phillips 49959 Ramsay 54556 Prentice 49960 Rockland 54557 Presque Isle 49961 Sidnaw 54558 Saint Germain 49962 Skanee 54559 Saxon 49963 South Range 54560 Sayner 49964 Stambaugh 54561 Star Lake 49965 Toivola 54562 Three Lakes 49967 Trout Creek 54563 Tony 49968 Wakefield 54564 Tripoli 49969 Watersmeet 54565 Upson 49970 Watton 54566 Wabeno 49971 White Pine 54568 Woodruff

Zip Code Town/City Zip Code Town/City Zip Code Town/City Minnesota 55601 Beaver Bay 55751 Iron, Iron Junction 56601 Bemidji, Turtle River, Wilton 55602 Brimson 55752 Jacobson 56619 Bemidji 55603 Finland 55753 Keewatin 56621 Bagley 55604 Grand Marais 55756 Kerrick, Duquette 56623 Baudette, Pitt 55605 Grand Portage 55757 Kettle River 56626 Bena 55606 Hovland 55758 Kinney 56627 Big Falls 55607 Isabella 55760 Mcgregor 56628 Bigfork 55609 Knife River 55763 Makinen 56629 Birchdale 55612 Lutsen 55764 Marble 56630 Blackduck 55613 Schroeder 55765 Meadowlands, Toivola 56631 Bowstring 55614 Silver Bay, Little Marais 55766 Melrude 56633 Cass Lake 55615 Tofte 55767 Moose Lake 56634 Clearbrook 55616 Two Harbors 55768 Mountain Iron, Parkville 56636 Deer River 55701 Adolph, Duluth 55769 Nashwauk 56637 Talmoon 55702 Alborn 55767 Moose Lake 56639 Effie 55703 Angora 55768 Mountain Iron, Parkville 56641 Federal Dam 55705 Aurora 55769 Nashwauk 56644 Gonvick 55706 Babbitt 55771 Orr, Buyck, Gheen 56646 Gully 55707 Barnum, Mahtowa 55772 Nett Lake, Orr 56647 Hines 55708 Biwabik 55775 Pengilly 56649 International Falls 55709 Bovey 55777 Virginia 56650 Kelliher, Saum 55710 Britt 55779 Saginaw, Culver 56651 Lengby 55711 Brookston 55780 Sawyer 56652 Leonard 55713 Buhl 55781 Side Lake 56653 Littlefork 55716 Calumet 55782 Soudan 56654 Loman 55717 Canyon 55784 Swan River 56655 Longville 55718 Carlton 55785 Swatara 56657 Marcell 55719 Chisholm 55786 Taconite 56658 Margie 55720 Cloquet 55787 Tamarack 56659 Max 55721 Cohasset 55790 Tower 56660 Mizpah 55722 Coleraine 55791 Twig 56661 Northome 55723 Cook, Togo 55792 Virginia 56662 Outing 55724 Cotton, Kelsey 55793 Warba 56663 Pennington, Blackduck 55725 Crane Lake 55795 Willow River, Rutledge 56666 Ponemah 55726 Cromwell 55796 Winton 56667 Puposky 55730 Grand Rapids 55797 Wrenshall 56668 Ranier 55731 Ely 55798 Wright 56669 Kabetogama, Ray 55732 Embarrass 55801 Duluth 56670 Redby 55733 Esko 55802 Duluth 56671 Redlake 55734 Eveleth 55803 Duluth 56672 Remer, Boy River 55736 Floodwood, Wawina 55804 Duluth 56673 Roosevelt 55738 Forbes, Zim 55805 Duluth 56676 Shevlin, Pinewood 55741 Gilbert, Mckinley 55806 Duluth 56678 Solway, Becida 55742 Goodland 55807 Duluth 56679 South International Falls 55744 Grand Rapids 55808 Duluth 56680 Spring Lake 55745 Grand Rapids 55810 Duluth, Hermantown, Proctor 56681 Squaw Lake 55746 Hibbing, Kelly Lake 55811 Duluth, Hermantown 56682 Swift, Roosevelt 55747 Hibbing 55812 Duluth 56683 Tenstrike 55748 Hill City 55814 Duluth, Duluth Federal Prison 56684 Trail 55749 Holyoke, Wrenshall 55815 Duluth 56685 Waskish 55750 Hoyt Lakes 55816 Duluth 56686 Williams 56687 Wilton 56688 Wirt

Appendix B - Results from target firm contacts by industry (primary NAICS code)

Primary Survey NAICS done NAF Declined Stop Disconnected DNC Total 211111 1 2 1 4 212111 1 1 212399 2 1 2 2 7 221122 1 1 2 236115 1 1 2 238210 1 1 238220 1 1 311811 2 2 311999 1 1 312111 1 1 2 312120 1 1 314910 1 1 314999 1 1 315220 1 1 315240 1 1 321113 1 5 3 9 321211 2 2 321219 1 1 321918 1 1 2 4 321920 1 1 321999 1 1 2 322121 2 3 2 2 9 322220 1 1 323111 1 1 323113 2 2 324110 1 1 325412 1 1 326113 1 1 326191 1 1 326199 1 1 2 327320 1 1 327993 1 1 331110 1 1 331511 1 1 2 331513 1 1 332216 1 1 332216 1 1 332312 1 2 2 5 332322 1 1 332618 1 1 332710 1 1 1 3 332812 1 1 332813 1 1 332996 1 1 332999 1 1 333120 1 1 2 333241 2 1 3 333243 1 1 333318 1 1 333413 1 2 3 333515 1 1 333618 1 1 333999 1 1 334412 1 1 334419 1 1 2 334511 0 335912 1 1 335999 1 1 339112 1 1 339920 2 2 339999 1 7 3 1 1 13 Continued

Appendix B - continued Primary Survey NAICS done NAF Declined Stop Disconnected DNC Total 423210 1 1 423310 1 1 423310 2 2 423320 1 1 423390 1 1 423420 1 1 423450 1 1 423610 1 1 2 423720 2 2 423810 1 2 3 423830 1 2 3 423840 1 1 423910 1 1 423930 1 1 1 3 423990 2 1 3 424110 2 1 3 424420 1 1 2 424430 1 1 424440 1 1 424490 1 1 424510 1 1 424690 1 1 424720 2 3 1 6 424810 1 1 424820 1 1 441228 1 1 443142 1 1 444190 1 1 2 445110 4 4 445120 1 1 445230 1 1 445299 1 1 448140 1 1 452111 5 5 452111 2 2 453110 1 1 1 3 453310 1 1 482111 1 1 484230 1 1 488190 2 2 493130 1 1 511110 8 8 511140 1 1 511199 1 1 511210 1 1 512131 1 1 2 515112 6 1 7 515120 3 1 4 517110 1 1 2 517919 4 4 518210 1 1 2 519120 2 1 3 522110 2 1 1 4 523110 1 1 523910 1 1 523930 1 1 524114 1 1 524210 2 2 524298 1 1 531210 1 1 2 Continued

Appendix B - continued Primary Survey NAICS done NAF Declined Stop Disconnected DNC Total 541110 1 1 2 541211 1 1 541219 1 1 541310 1 1 541330 4 2 1 7 541511 1 1 1 3 541549 1 1 541613 1 1 541614 1 1 541690 1 1 541711 2 1 3 541810 1 1 551111 1 1 1 3 561311 1 1 561422 1 1 561720 1 1 561990 2 2 611110 1 1 611310 1 4 5 621111 2 2 621391 1 1 621493 2 1 1 4 621610 1 1 622110 5 1 1 5 1 13 623110 1 1 1 3 623312 1 1 624310 2 2 713210 1 2 5 8 713290 1 1 721110 1 2 3 721199 1 1 721214 1 1 722320 1 1 722410 1 1 722511 1 1 722515 1 1 811212 1 1 813311 1 1 813319 1 1 2 813410 1 1 813910 1 1 2 921120 2 4 1 7 922140 1 1 923130 1 1 926120 1 1 999990 1 1 Total 55 152 22 85 8 20 342

Appendix C – Cost Differential Between Trucking and Flying Freight

Example uses FedEx Boeing 757 versus Truck (tractor-trailer)

Trucking Cost

Route DLH MSP DLH ORD OW miles 165 459 Cost/mile $ 1.68 $ 1.68 Cost per OW trip $ 277 $ 769 Cost per pound: Pounds Semi trailer max payload 45,000 $ 0.0061 $ 0.0171 90% 40,500 $ 0.0068 $ 0.0190 80% 36,000 $ 0.0077 $ 0.0214

50% 22,500 $ 0.0123 $ 0.0342

Appendix D – Potential Partners

Carriers with the highest airfreight potential for DLH include:

Passenger airlines that also carry airfreight  American Airlines – Size makes AA attractive partner, but likelihood of mainline aircraft is low initially  Southwest – Size and history of serving smaller cities is good match, but competition from other airports/markets is fierce.  Sun Country – Emphasis on their MSP hub makes this a long shot.

All cargo airlines All of these carriers have cargo operations, often with some scheduled service as well as charter operations. Each operates larger freighters and have routes that offer potential for DLH.  ABX (US)  Atlas Air Cargo (US)  Cargolux (Luxembourg)  Cathay Pacific Cargo (Hong Kong)  Kalitta Air (US)  Korean Air Cargo (South Korea)  Lufthansa Cargo (Germany)  Polar Air Cargo (US)  Southern Air (US)

Airfreight forwarders Best source of information is the Air Forwarders Association at www.airforwarders.org They also offer an annual conference that would be good event for meeting contacts at forwarders, airlines and other airfreight industry participants.

Air freight trucking firms  ForwardAir www.forwrdair.com  MATS www.matstrucking.com  R & M Trucking www.rmtrucking.com  SBS Transportation www.sbstransportation.com  Sterling Transportation www.sterlingtransportation.com  Tax-Air www.taxair.com

Third party logistics (3PL) firms 3PL Firms in Minnesota:  CH Robinson www.chrobinson.com  Freight Management Logistics www.fmlfreight.com  Koch Logistics www.kochlogistics.com Top 100 3PL Firms directory: http://resources.inboundlogistics.com/digital/top_100_3pl_providers_2015.pdf

Transportation and logistics trade associations  Airforwarders Association www.airforwarders.org  The International Air Cargo Association www.tiaca.org  APICS www.apics.org (Includes the American Society of Transportation & Logistics, which merged into APICS in summer 2015)

Appendix E – Known or likely airfreight users in DLH region

ZIP Primary Location Location Company Name Address City State Code NAICS Employees Type AAR Corp 4600 Stebner Rd Duluth MN 55803 488190 150 Branch Action Floor Systems LLC 4781 N US Highway 51 Mercer WI 54547 321918 140 Single Loc Advanstar Inc 131 W 1st St Duluth MN 55802 517919 300 Branch Aero Design & Mfg Co 8 S 18th Ave W Duluth MN 55806 339999 100 Single Loc Aerostich 8 S 18th Ave W Duluth MN 55806 315220 79 Single Loc Airpark Products & Svc 4619 Airpark Blvd Duluth MN 55811 423930 80 Single Loc Allete 30 W Superior St Duluth MN 55802 221122 1625 Headquarters Altec Hiline 1255 Port Terminal Road Duluth MN 55802 238210 40 NA AMSOIL Inc 925 Tower Ave Superior WI 54880 424720 52 Headquarter Anderson Fabrics Inc 348 Summit Ave W Blackduck MN 56630 314999 301 Single Loc ANI Pharmaceuticals Inc 210 W Main St Baudette MN 56623 541711 89 Headquarter Anna Marie Designs Inc 811 3rd St W Ashland WI 54806 315240 150 Single Loc Arcelormittal Minorca Ine Inc 5950 Old Highway 53 N Virginia MN 55792 331110 341 Branch Artisans Inc W4146 2nd St Glen Flora WI 54526 323113 50 Single Loc ASV Inc 840 Lily Ln Grand Rapids MN 55744 333120 240 Subsidiary Barko Hydraulics LLC 1 Banks Ave Superior WI 54880 423830 150 Branch Barr Engineering Co 332 W Superior St # 600 Duluth MN 55802 541330 100 Branch Barr Engineering Co 3128 14th Ave E Hibbing MN 55746 541330 75 Branch Bemidji Holding Co 1600 Paul Bunyan Dr NW Bemidji MN 56601 551111 108 Headquarter Bemidji Pioneer 1320 Neilson Ave SE Bemidji MN 56601 511110 65 Branch Bendtec Inc 366 Garfield Ave Duluth MN 55802 332996 100 Single Loc Bergquist Co 61959 State Highway 38 Bigfork MN 56628 334419 134 Branch Bernick's 4301 W Michigan St Duluth MN 55807 424490 86 Branch C G Bretting Mfg Co Inc 3401 Lake Park Rd Ashland WI 54806 333243 400 Single Loc Calumet Superior LLC 2407 Stinson Ave Superior WI 54880 324110 154 Subsidiary Caterpillar Forest Products 474 Birch St Prentice WI 54556 423810 140 Branch Century Link 322 W First St Duluth MN 55802 517210 2 Branch Charter Nex Films 1901 Winter St Superior WI 54880 326113 130 Branch Chequamegon Communications Inc 43705 US Highway 63 Cable WI 54821 518210 50 Headquarter CHS Inc 41 Dock St Superior WI 54880 424510 50 Branch Clear Channel Media & Entrtn 616 Pershing Ave SE Bemidji MN 56601 515112 50 Branch Cliffs Natural Resources Inc 200 E Superior St Duluth MN 55802 212399 300 Branch Coca-Cola Bottling Co 300 S Central Ave Duluth MN 55807 312111 100 Branch CW Technology 5614 Grand Ave Duluth MN 55807 541519 4 Headquarter Deer River Wild Rice Inc E Highway 2 Deer River MN 56636 311999 80 Single Loc Donaldson Co 3401 Technology Dr Duluth MN 55811 333413 160 Branch Duluth News Tribune 424 W 1st St Duluth MN 55802 511110 160 Branch 1409 Hammond Ave # Enbridge Energy 200 Superior WI 54880 211111 190 Branch

ZIP Primary Location Location Company Name Address City State Code NAICS Employees Type 1402 Progress Park Pkwy Entronix International Inc # A Eveleth MN 55734 339999 75 Single Loc Essar Steel Minnesota LLC 555 W 27th St Hibbing MN 55746 332312 100 Single Loc Essentia Health 502 E Second St Duluth MN 55805 622110 6500 Headquarter ETS-Lindgren 7352 Giles Dr Minocqua WI 54548 334419 55 Branch Fitgers Brewhouse 600 E Superior St Duluth MN 55802 312120 60 Single Loc Flambeau River Papers LLC 200 1st Ave N Park Falls WI 54552 322121 350 Single Loc Floe International 48473 State Highway 65 Mcgregor MN 55760 339999 60 Single Loc Franklin Foods Co 1925 W 1st St Duluth MN 55806 424430 80 Single Loc General Mills Inc 5045 S Pond Rd Poplar WI 54864 424420 100 Branch Genesis Attachments 1000 Genesis Dr Superior WI 54880 333120 72 Branch Georgia-Pacific Corp 115 Depot Rd Phillips WI 54555 321113 90 Branch Granite Broadcasting Corp 246 S Lake Ave Duluth MN 55802 515120 75 Branch Graymont Wi Inc 1 Hill Ave Superior WI 54880 423320 50 Single Loc Harvest State Co-Op 20 Dock St Superior WI 54880 493130 50 Single Loc Hibbing Taconite Co County Road 5 N Hibbing MN 55746 212399 1100 Branch Hill Wood Products Inc 9483 Ashawa Rd Cook MN 55723 321999 90 Single Loc Horner Flooring Co Inc 23400 Helman Ave Dollar Bay MI 49922 339999 70 Single Loc IAP Industrial Air Products W6905 Paradise Ln Phillips WI 54555 333413 75 Single Loc IKONICS Corp 4832 Grand Ave Duluth MN 55807 323113 64 Headquarter Industrial Lubricant 35108 US Highway 2 Grand Rapids MN 55744 424720 60 Single Loc Iracore International Inc 3430 13th Ave E Hibbing MN 55746 332812 100 Subsidiary Jarden Home Brands 1800 Cloquet Ave Cloquet MN 55720 423830 250 Branch John A Biewer Co Of Wi Inc 400 Red Pine Ct Prentice WI 54556 321113 100 Branch Johnson Controls 4627 Airpark Blvd Duluth MN 55811 423610 20 Branch Krech Ojard & Assoc Consulting 227 W 1st St # 200 Duluth MN 55802 541330 59 Single Loc Lake Superior Consulting Inc 130 W Superior St # 614 Duluth MN 55802 541330 270 Single Loc Larson-Juhl Inc 800 Sum Rd Ashland WI 54806 339999 80 Branch LHB Inc 21 W Superior St # 500 Duluth MN 55802 541310 130 Headquarter Loegering Manufacturing Inc 840 Lily Ln Grand Rapids MN 55744 333999 60 Branch M N Star Technologies Inc 4201 E US Highway 169 Grand Rapids MN 55744 335999 52 Single Loc Manion's Wholesale Bldg Spls 1300 Garfield Ave Superior WI 54880 321918 80 Single Loc Marquip Ward United 1300 N Airport Rd Phillips WI 54555 333318 500 Subsidiary maurices 105 W Superior St Duluth MN 55802 448120 300 Subsidiary ME Global Inc 200 E Carterett St Duluth MN 55808 331513 130 Single Loc Midwest Communications 11 E Superior St # 380 Duluth MN 55802 515112 50 Single Loc Midwest Energy Resources Co 2400 Winter St Superior WI 54880 212111 90 Branch Minnesota Twist Drill Co Inc 1 7th St NW Chisholm MN 55719 332216 101 Single Loc Mountain Minntac Iron Ore Operations 8819 Old Highway 169 Iron MN 55768 212399 1100 Branch Moline Machinery LLC 114 S Central Ave Duluth MN 55807 333241 70 Single Loc 4535 Airport Approach Monaco Air Duluth Rd Duluth MN 55811 488190 23 Single Loc

ZIP Primary Location Location Company Name Address City State Code NAICS Employees Type Musson Brothers Inc 909 Boyce Dr Rhinelander WI 54501 327320 150 Single Loc Natural Resources Rsrch Inst 5013 Miller Trunk Hwy Hermantown MN 55811 541711 150 Branch New Page Corp 100 N Central Ave Duluth MN 55807 322121 298 Branch Nicolet Hardwoods Corp 100 Mill St Laona WI 54541 321113 50 Single Loc Norbord Minnesota Inc 4409 Northwood Rd NW Solway MN 56678 321219 140 Single Loc Nortech Systems 4050 Norris Ct NW Bemidji MN 56601 332618 300 Branch North American Salt Co 1120 W Railroad St Duluth MN 55802 445299 80 Branch North Central Door Co LLC 900 Carr Lake Rd SE Bemidji MN 56601 339999 81 Single Loc North Shore Financial Corp 131 W Superior St Duluth MN 55802 551111 50 Headquarter Northcentral Telecom Inc N4450 Englund Rd Prentice WI 54556 517919 63 Single Loc Northern Foundry LLC 555 W 25th St Hibbing MN 55746 331511 101 Subsidiary Northern Star Co-Op Svc 105 Main Ave W Deer River MN 56636 424720 51 Single Loc Northland Fishing Tackle 1001 Naylor Dr SE Bemidji MN 56601 423910 60 Single Loc Northshore Manufacturing Inc 530 Recycle Center Dr Two Harbors MN 55616 332312 75 Single Loc Northshore Mining Co 10 Outer Dr Silver Bay MN 55614 212399 335 Subsidiary Northshore Mining Co County Road 70 Babbitt MN 55706 212399 150 Branch Northstar Aerospace Inc 4212 Enterprise Cir Duluth MN 55811 334511 100 Branch Nts 526 Chestnut St Virginia MN 55792 541711 50 Single Loc Occupational Development Ctr 1219 Naylor Dr SE Bemidji MN 56601 321999 100 Single Loc Office Planning Group Inc 20586 Royce Rd Hancock MI 49930 423420 50 Single Loc Olympak Printing & Packaging 1321 SE 8th St Grand Rapids MN 55744 323111 75 Single Loc Park Falls Hardwoods 143 5th Ave N Park Falls WI 54552 321113 58 Single Loc Phillips Plating Corp 984 N Lake Ave Phillips WI 54555 332813 80 Single Loc Pinnacle Publishing LLC 4030 Technology Dr NW Bemidji MN 56601 511140 70 Single Loc Potlatch Woodlands Bemidji MN 56601 321113 95 Single Loc

Printpack Inc 114 W Kemp St Rhinelander WI 54501 322220 150 Branch Rajala Timber Co 31784 Great Lakes Rd Deer River MN 56636 321113 50 Single Loc Republic Banchsares Inc 306 W Superior St Duluth MN 55802 551111 50 Headquarter RGIS Inventory Specialists 1325 Tower Ave # 4 Superior WI 54880 561990 100 Branch Sandstrom's 2057 E Highway 2 Grand Rapids MN 55744 424410 60 Single Loc Sappi Fine Paper North America 2201 Avenue B Cloquet MN 55720 322121 750 Branch Saratoga Liquor Co Inc 3215 James Day Ave Superior WI 54880 424820 50 Single Loc Saunders Wood Specialties Inc 1000 9th St N Park Falls WI 54552 321211 55 Single Loc Savanna Pallets Inc 41496 State Highway 65 Mcgregor MN 55760 321920 70 Single Loc Lac Du Simpson Electric Co 520 Simpson Ave Flambeau WI 54538 339112 140 Single Loc SISU 5 W 1st St # 200 Duluth MN 55802 541511 66 Single Loc St Croix Of Park Falls LTD 876 4th Ave N Park Falls WI 54552 339920 150 Single Loc St Louis Environmental Svc 307 1st St S # 115 Virginia MN 55792 423930 55 Single Loc St Luke's 915 East First St Duluth MN 55805 622110 NA Headquarter Stanley LA Bounty Mfg Inc 1538 Highway 2 Two Harbors MN 55616 333515 160 Branch Stealth Medical Technologies 1365 Cedar St Hancock MI 49930 423450 300 Single Loc

ZIP Primary Location Location Company Name Address City State Code NAICS Employees Type Superior Kilns Inc E O State 77 Rd Mellen WI 54546 423310 55 Single Loc Swanstrom Tools USA Inc 3300 James Day Ave Superior WI 54880 332216 72 Single Loc TEAM Industries Inc 105 Park Ave NW Bagley MN 56621 332710 315 Headquarter Trig's 925 E Wall St Eagle River WI 54521 453110 100 Branch Twin Ports Testing Inc 1301 N 3rd St # N1 Superior WI 54880 541330 59 Single Loc Two Harbors Machine Shop Inc 511 25th Ave Two Harbors MN 55616 332710 100 Single Loc United Taconite 8470 Townline Rd Forbes MN 55738 212399 528 Subsidiary United Taconite Hibbing MN 55746 212399 300 Branch

UPM Blandin 115 SW 1st St Grand Rapids MN 55744 322121 400 Branch Upper Lakes Foods Inc 801 Industry Ave Cloquet MN 55720 424420 375 Single Loc US Steel Corp 1 Mine Rd Keewatin MN 55753 331511 550 Branch USG Interiors 35 Arch St Cloquet MN 55720 327993 450 Branch Mountain USX Corp County Road 102 Iron MN 55768 212399 1000 Single Loc United Health Group 4316 Rice Lake Rd Duluth MN 55811 524114 900 Branch Utilities Plus Energy Svc 1280 Industrial Park Eveleth MN 55734 541330 63 Single Loc Veritas Steel LLC 329 2nd St # 146 Proctor MN 55810 332312 50 Branch W D Flooring LLC 5215 Mill Rd Laona WI 54541 321918 75 Single Loc Ziegler Inc 10081 E Highway 169 Buhl MN 55713 423810 100 Branch

Appendix F - Truck Hub Model

The concept of an airfreight-trucking hub is similar to the ones used for passenger air transportation and for airfreight. Airfreight is consolidated at a regional hub served by surface transportation and then trucked to an airport for transshipment via air. Some of the airfreight trucked to the airport may simply be delivered in that area without ever being put on an aircraft.

The spokes to the regional hub would be served by vehicles suitable to the size of the markets. For smaller markets a van would be appropriate, while larger markets would warrant a straight truck. The consolidated airfreight destined for a major airport would be transported by a straight truck or tractor-trailer depending on the size of the overall operation.

In the case of DLH, a trucking hub might look something like the map shown below, with morning deliveries made on trips outbound from DLH and afternoon pickups made on the return trip to DLH. Loads would be consolidated for transport to MSP and/or ORD in the evening, with inbound freight from MSP and/or ORD broken down by delivery routes in the morning.

Appendix G - Model for Predicting Airfreight Volume at an Airport

The data in Table 16 were used to develop a model for establishing an expected volume of airfreight from an airport. The data are for airports in metropolitan areas of similar size to Duluth-Superior, so the model would apply to metropolitan areas in the same size range, as opposed to much smaller or larger metropolitan areas.

Regression analysis was used to determine correlations between variables related to population, economic activity and other variables. Attempts to do so met with little success, primarily due to the distortions caused by the operations of FedEx and UPS at selected airports. The volume of airfreight handled by FedEx and UPS means they create haves and have-nots among airports depending on where they choose to assemble airfreight volume to be flown to sorting hubs. The impact of FedEx and UPS on traffic volume at airports forced modifications of the typical process of developing a model using regression analysis.

The first graph on the next page plots the relationship of employment in each metro area versus pounds of airfreight loaded in 2014 at the airports listed in Table 16. It shows very little relationship between employment and airfreight volume – metro areas of all sizes have airports with low airfreight volume. However, a number of metro areas have very high airfreight volumes. These locations have FedEx or UPS operations at their airports. Rockford, IL (RFD) is an extreme example where UPS is operating mainline flights from RFD apparently to avoid congestion at ORD and pulling freight from the northern Chicago metro area. The second graph on the next page shows the results when the outlier (RFD) is removed. It permits the scale for pounds to show more detail in the lower volume areas, other outliers are clearly visible. Other measures of economic activity versus airfreight volume, including population, number of firms, number of business establishments, payroll, and sales receipts, yield similar results.

Airport 2014 Airfreight FedEx UPS Volume (pounds) RFD 142,194,258 Mainline LBB 45,759,237 Mainline Feeder CID 41,602,488 Feeder Mainline FSD 38,497,778 Mainline Mainline GSP 34,951,334 Mainline Mainline LRD 26,339,316 Mainline

Scatterplot of Freight vs Employees 160000000

140000000

120000000

) s 100000000

u o 80000000

(

t h 60000000

r F 40000000

20000000

50000 75000 100000 125000 150000 Employees in Metro Area

Scatterplot of Freight vs Employees - without RFD 50000000

40000000

)

n 30000000

(

t h 20000000

10000000

50000 75000 100000 125000 150000 Employees in Metro Area

A large number of regression analysis iterations were made while varying the combination of the following variables:  The 2010 population of the metropolitan statistical area served by an airport  The percent change in the population from 2000 to 2010.  The number of firms in the area.  The number of establishments in the area (a firm can operate multiple establishments)  The total employment in the area  The payroll in thousands of dollars for the area  The receipts (sales) in thousands of dollars of businesses in the area  The average number of operations for 2010-2014 at the airport for Air Carriers (60+ passengers or 18,000+ pound payload) and Air Taxis (fewer than 60 passengers or a payload of less than 18,000 pounds)  The total operations of Air Carriers and Air Taxis combined  The distance (miles) to the nearest major airport As an outlier, the observation for RFD was excluded from the analysis. The demographic and economic data were obtained from U.S. Bureau of Labor Statistics and Census Bureau databases. The aircraft operating data are from the Federal Aviation Administration. The volume of airfreight is drawn from Department of Transportation data drawn from carriers’ Form 41 reports.

The best model to emerge from the process used receipts (sales) in thousands of dollars of businesses in the area and the payroll in thousands of dollars for the area. In addition, whether the area is served by mainline flights operated by FedEx and/or UPS was included in the analysis since the availability of that service impacts freight volume significantly. The differences between airport with mainline service and those without the service are illustrated in the two scatter plots shown on the next page.

Scatterplot of Freight vs Employees - Airports with Mainline Service 50000000 LBB

CID 40000000 FSD GSP

)

u 30000000

P LRD

(

r 20000000

ROA SBN RST 10000000 SAV

70000 80000 90000 100000 110000 120000 130000 140000 Employees

Scatterplot of Freight vs Employees - Airports with No Mainline Service

4000000 BTV

3000000

)

(

2000000 YKM

h EUG

i BLI

e ILM

F 1000000 SBP CRW DLH AMA CLL GGG FSM FARAZO LNK TCL GNV SPI ACT TRI GRB 0 TYR MBS MCN 50000 75000 100000 125000 150000 Employees in Metro Area

The result is two related models with baselines that differ based on the availability of FedEx and/or UPS mainline service:

No mainline service

Freight (pounds) = 980,702 + 0.469907 Receipts - 3.093 Payroll

Mainline service from FedEx and/or UPS

Freight (pounds) = 26,192,900 + 0.469907 Receipts - 3.093 Payroll

Breaking these models down by variable:  The difference between a mainline airport and an airport without mainline service from either FedEx or UPS is over 25 million pounds of airfreight per year. This is derived from the difference in the constants (first terms) of each model: 26,192,900 less 980,702 is more than 25 million.  The second term is identical in each model: the value of the total receipts (sales) in the metropolitan area over a year in thousands of dollars times 0.469907.  The third term is also identical in each model: The value of the total payroll in the metropolitan area over a year in thousands of dollars times -3.093. (A negative coefficient for payroll is counterintuitive, but it works in conjunction with the coefficient for total receipts.)

The models explain almost 68% of the variance in airfreight volume using the three variables, based on the adjusted R2 value for the model. The remaining 32% originates with other, unidentified variables. A great deal of that variability is likely due to differences in the size of geographic areas around each airport from which FedEx and UPS consolidate airfreight, but there would also be some error introduced by the use of metropolitan area data when the catchment area for the airport could extend to areas well beyond the metropolitan area. The relatively high level of the adjusted R2 value, along with the fact that the results include p values of 0.102880 for receipts and 0.154285 for payroll, indicate the overall results are strong and the model could be useful in benchmarking and planning. Details of the results of this regression analysis (output from the Minitab 16 statistical package) are on the following pages.

General Regression Analysis: Freight versus Receipts, Payroll, Main

Regression Equation

Main N Freight = 980702 + 0.469907 Receipts - 3.093 Payroll

Y Freight = 2.61929e+007 + 0.469907 Receipts - 3.093 Payroll

Coefficients

Term Coef SE Coef T P Constant 13586802 5792822 2.34545 0.026 Receipts 0 0 1.68419 0.103 Payroll -3 2 -1.46277 0.154 Main N -12606100 1597990 -7.88872 0.000

Summary of Model

S = 7716078 R-Sq = 70.88% R-Sq(adj) = 67.87% PRESS = 2.531421E+15 R-Sq(pred) = 57.31%

Analysis of Variance

Source DF Seq SS Adj SS Adj MS F P Regression 3 4.20251E+15 4.20251E+15 1.40084E+15 23.5285 0.000000 Receipts 1 4.89246E+14 1.68879E+14 1.68879E+14 2.8365 0.102880 Payroll 1 8.10548E+12 1.27393E+14 1.27393E+14 2.1397 0.154285 Main 1 3.70516E+15 3.70516E+15 3.70516E+15 62.2319 0.000000 Error 29 1.72660E+15 1.72660E+15 5.95379E+13 Total 32 5.92911E+15

Fits and Diagnostics for Unusual Observations

Obs Freight Fit SE Fit Residual St Resid 2 1405988 9564977 5490408 -8158989 -1.50492 X 4 41602488 26720120 3136431 14882368 2.11101 R 18 45759237 26258890 2849544 19500347 2.71947 R 24 6327752 25831814 2792278 -19504062 -2.71149 R

R denotes an observation with a large standardized residual. X denotes an observation whose X value gives it large leverage.

100

Scatterplot of Freight vs Receipts 50000000 LBB

CID 40000000 FSD GSP

30000000

t LRD

F 20000000

ROA SBN RST 10000000 SAV BTV ILM YKM EUG SBP FSM BLI CLL SPI ACT TRI AMA AZO DLH GRB 0 GNV MBS MCNTYR GGGCRW TCL FAR LNK 10000000 15000000 20000000 25000000 30000000 35000000 40000000 Receipts

Scatterplot of Freight vs Payroll 50000000 LBB

CID 40000000 FSD GSP

30000000 LRD

F 20000000

ROA SBN RST 10000000 SAV ACT BTV YKM SBP GGG EUG CLL BLI TCLSPI TYR ILM TRIFAR AZO GRB 0 MCN GNVMBS FSM AMA CRW DLH LNK 2000000 3000000 4000000 5000000 6000000 Payroll

101

Residual Plots for Freight Normal Probability Plot Versus Fits

99 20000000

90 10000000

c 50 i 0

P R -10000000 10

1 -20000000 -20000000 -10000000 0 10000000 20000000 0 10000000 20000000 30000000 Residual Fitted Value

Histogram Versus Order 20 20000000

10000000 y 15

d u i 0

10 s

R F 5 -10000000

0 -20000000 -20000000 -10000000 0 10000000 20000000 1 5 10 15 20 25 30 Residual Observation Order

102