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The Impact of Express Carriers for Italy’s Economy and Competitiveness

Associazione Italiana Corrieri Aerei Internazionali

THE IMPACT OF EXPRESS

CARRIERS FOR ITALY’S ECONOMY AND COMPETITIVENESS

January 2004

A Report by

Oxford Economic Forecasting and

Centro Studi Confindustria

Oxford Economic Forecasting Centro Studi Confindustria

ABBEY HOUSE VIALE DELL'ASTRONOMIA, 30 121 ST ALDATES 00144 ROME OXFORD ITALY OX1 1HB TEL: +44 (0)1865 202828 TEL: +39 (0)6 59 03240

AICAI 1 January 2004


Contents 1. Executive Summary 3 2. Introduction 6 3. The size and reach of the express industry 7 4. The role of the express industry in facilitating Italian trade 15 5. The role of the express industry in facilitating productivity and investment 25 6. The role of express services in facilitating the new economy 38 7. The express industry – a leading growth sector 45 8. The total contribution of the express industry to the Italian economy 50 9. The economic impact of restrictions on night flights 56 10. Annex: Survey of Italian companies 60



Executive Summary The Impact of Express Carriers for Italy’s Economy and Competitiveness

Background

• This report has been prepared by Oxford Economic Forecasting with contributions from Centro Studi Confindustria. Through a combination of industry surveys, analysis and econometric modelling, it demonstrates the importance of the express industry to Italy’s economy and competitiveness.

• The report concludes that the express industry is making a very important contribution to the Italian economy in facilitating trade and investment, and contributing to the overall competitiveness of business. The express industry is helping Italian companies to implement best international business practice, improve their customer service and compete effectively in the ‘new economy’.

• The express industry remains one of the world’s fastest growing sectors. Globalisation of business, streamlined supply chains and improved logistics now rely on the services of the express industry. According to the OECD, almost 40% of world trade in goods by value is now carried by air.

Facilitating trade, productivity and investment

• Express operators provide guaranteed, fast, reliable, on demand, world-wide, integrated, door-to-door movement of shipments which are tracked and controlled throughout the journey. They are the “Business Class” of cargo services. In order to provide that premium service with guaranteed delivery, the express industry depends on overnight transport, by fully utilizing time outside normal working hours.

• Express services simplify the transportation process for customers, taking responsibility for customs clearance, duties, export and exchange formalities. Shipments are distributed through major airport gateways, particularly Milano Malpensa, Milano Linate, Bergamo, Roma Ciampino and Roma Fiumicino. Express transportation is not confined to a single mode or routing. The inter-modal journey may comprise use of trucks, vans, trains, passenger and freight aircraft. As a result, express services meet the increasing demand for time-definite products, enabling customers to reduce delivery times, respond faster to market requirements, reduce stockholdings and save in warehousing.

• The Italian express industry makes a significant direct contribution to the Italian economy: It carried over 121 million shipments to, from or within Italy in 2002. It employs over 24,000 people – more than the Italian computer manufacturing

industry - and contributes €634 million a year to Gross Domestic Product. Allowing for impacts through the supply chain, the express industry helps to

support at least 47,000 jobs in Italy. The express industry contributed €334 million to the Italian Treasury in 2002. It transports over €14 billion of Italian exports a year, more than 5.5% of total

goods exports by value. • Moreover, the express industry is one of Italy’s fastest growing sectors – its direct

employment has risen at an average rate of 7.7% a year over the last seven years.

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• Our survey of Italian companies confirms the importance of express services to Italian

business: 54% of firms consider next-day express delivery services to be very important

to meeting their commitments to clients. Companies rely on next-day delivery in part because their customers demand it

to meet their streamlined production processes or for delivery of spare parts. Other companies consider next-day delivery services to be important because

their products are perishable or time-sensitive. The largest majority of companies require their suppliers at times to deliver

certain shipments to them by express delivery. Over 30% of Italian firms would possibly have to hold increased inventories to

ensure that they could meet consumer demand if next-day delivery were no longer available, increasing their costs.

80% of Small and Medium Size Enterprises (SMEs) expect that they would lose some export orders if next-day international delivery services were no longer available.

Good access to markets is the most important factor influencing international location decisions. Without guaranteed international next-day delivery, our survey suggests that about 10% of Italian firms would probably have to relocate some of their operations in another country.

• For the Italian regions, the coverage provided by the express industry means that the remote or peripheral regions can participate in world commerce. Together with the industry pricing structure, this coverage means that regional businesses operating from lower-cost locations do not have those benefits diluted by high transport costs or poor delivery times.

The role of the express industry in facilitating the new economy

• Express services are important to the success of many firms in Italy, but they are even more important for companies involved in the ‘new economy’. Almost all of the new economy firms we surveyed report that there are aspects to their companies’ delivery commitments to clients for which next-day delivery services are important, compared with 54% across the economy as a whole. Similarly, a large majority of new economy companies we surveyed report that next-day delivery of sub-components is important to their business – principally because they operate JIT inventory systems – double the proportion across the whole economy.

Future growth of the express industry

• The express industry is expected to grow by 6.5% pa over the next ten years, nearly three times as fast as GDP, as international trade continues to expand and the express industry serves the increasing need for rapid, guaranteed delivery. As a result:

Direct employment in the express industry in Italy is expected to rise by more than 60% during the next decade to over 38,500 by 2013.

The direct contribution of the express industry to GDP is set to double to almost €1.3 billion by 2013.

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Revenues to the Italian Treasury from the express industry are also expected to almost double to over €665 million in 2013.

• Constraining the growth of express services in line with GDP would reduce employment in the express industry by about 14,000 in 2013, and revenues to the Treasury from the express industry would be €240 million lower.

The Express Industry – its importance to Italian economic growth

• The most important contribution the express industry makes to the Italian economy is through its impact on the capabilities and competitiveness of other sectors of the economy. We calculate that it currently contributes €1.3 billion of economic activity a year in Italy through its ‘catalytic’ impact on the performance of the rest of the economy and by helping to keep productive sectors located in Italy. Over the past twenty years, this catalytic contribution totals over €10 billion.

• Over the next twenty years, the catalytic contribution of the express industry to Italian GDP is set to increase to €2.1 billion a year in 2002 prices.

• Constraints on the growth of express services in Italy would therefore be more costly than just the loss in output from that sector. By forcing some firms to relocate and others to become somewhat less competitive, national output overall would be lower in the long run than it has the potential to be – at a cumulative cost in foregone GDP of about €19 billion over the next twenty years. Moreover, the short-run impact of such constraints would be even more pronounced: as firms close down their Italian operations, unemployment would increase, and a significant proportion of the capital stock – especially in the most affected sectors – would pass out of use.

• Comparing the use of scarce runway slots, a slot used by a single express service contributes about €29,000 in catalytic economic benefits to Italy, while a scheduled passenger service contributes about €10,000. While there are direct benefits to the Italian economy from leisure travel (and other social benefits), a typical tour charter flight has no catalytic economic impact.

Express industry – the economic cost of restricting night flights in Italy

• The ability to fly at night is critical if the Italian express industry is to guarantee the service’s key product – guaranteed next-day delivery.

• Next-day delivery is crucial to the industry and its customers. 41% of businesses surveyed stated that they would be very badly affected by the cessation of next-day deliveries, which can only be guaranteed by the operation of night flights. Moreover, about 10% of firms would probably relocate some of their operations out of Italy if next-day deliveries were not guaranteed, while our survey suggests that 4.5% of orders for Italian goods and services could be lost.

• In the worst-case scenario, the loss of night flights by the express industry could reduce Italian GDP by up to €780 million a year. Over a twenty year period, we estimate that the cumulative cost in terms of foregone GDP would be over €30 billion. In addition, Italy would lose out on the opportunity to become the main hub for express operations in Southern Europe, North Africa and the Middle East.

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Introduction The express industry has been one of Italy’s fastest growing industries over the last decade. However, the express industry is not separately identified in Italy’s official economic statistics, and as a result its growing importance is not widely appreciated. Neither is the role that the express industry plays in facilitating the successful performance of companies in other sectors of the economy – particularly in the ‘new economy’ - through its impact on their ability to compete in a world where customers demand increasingly fast and reliable service.

This report sets out clearly the impact of express carriers for Italy’s economy and competitiveness. And it highlights the costs that the economy would face if there were to be restrictions on the future growth of the express industry. These costs need to be weighed against any environmental and other considerations that may lead some to recommend constraining the activities of the express industry, especially in flying from a number of airports at night, which is vital for many next-day international delivery services.

These issues, and the need for long-term planning security to ensure continued investment in Italy by the express industry, are important considerations for the government as it considers the implementation of EU directives on noise management and discusses the reform of civil aviation.

The information in this report is drawn primarily from three surveys: - A survey of the six leading express companies that are members of AICAI – DHL, FedEx, UPS, SDA, Skynet and TNT – to identify the turnover and value-added of their operations, their staffing levels and contribution to the Italian Treasury. These companies estimate that they account for just over half of the domestic express market and nearly four-fifths of the international express market.

- A survey of Italian companies asking about the importance of express delivery services to their businesses, and how their activities would be affected if there were restrictions on the availability of next-day international express deliveries. Confindustria selected 150 companies to be interviewed, with those chosen to be properly representative of the structure of the Italian economy (see Annex). The detailed interviews were then undertaken by ABACUS; the collected data were processed by OEF. Results are usually reported on an employment-weighted basis; that is, the response of a company employing 1,000 staff is given ten times the weight of that from a company employing 100 staff. Adopting alternative methods of weighting the responses does not affect the implications of the survey.

- A series of in-depth case study interviews with companies who use express services. OEF spoke to 8 companies from a range of sectors. These interviews allowed us to explore in more depth the way these companies rely on express services and how the use of express services affects the organisation of their production and distribution operations.

We gratefully acknowledge the help we have received from all of the organisations who assisted with these surveys. The design of the overall framework of analysis and drafting of the report was undertaken by OEF, with contributions from Centro Studi Confindustria.

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1 The Size and Reach of the Express Industry

Introduction 1.1 The most important contribution that the express industry makes to the Italian

economy is through its impact on the capabilities and competitiveness of other sectors of the economy. We describe in detail in this report how the express industry facilitates increased output, trade, investment and employment across Italian business.

1.2 But first we begin by explaining what the express industry is, how it initially developed in the late 1970s and how it has grown globally over the last 25 years.

1.3 We then illustrate the size of the Italian express industry within the Italian economy, in terms of its contribution to gross output, GDP, employment and taxes.

Key Findings: The express industry is one of the fastest growing sectors in the Italian

economy. Since 1991, its share in total Italian gross output (ie turnover) has more than doubled.

The Italian express industry now employs over 24,000 people (including 8,700 sub-contracted to the industry) and made a direct contribution to GDP of over €630 million in 2002. Employment in the express industry grew at an average rate of 7.7% a year between 1995 and 2002.

The express industry contributed over €330 million to Italian taxes in 2002.

A broad range of industries in Italy use express services. But the largest users are typically ‘high tech’ parts of manufacturing, business and financial services, textiles and leather goods, the transport equipment and engineering sectors.

The greatest contribution made by the express industry is in enabling Italian companies to compete effectively in an increasingly global market.

Definition and evolution of the express industry 1.4 The core business of the express industry is the provision of value-added, door-to-

door transport and deliveries of next-day or time deferred shipments, including documents, parcels and merchandise goods. (Deferred shipments normally incur a transit time of between 2 and 3 days.)

1.5 Other modes of transport on their own cannot respond to the needs of Italian business as effectively as the express industry. Traditional airfreight transportation services tend to stop at the boundaries of the airport, leaving customers with the problem of organising delivery to the airport and collection from the airport. These problems are particularly pronounced when it comes to delivering large numbers of small but urgent packages to different locations.



1.6 Traditional road and rail freight transportation services can only operate efficiently (and therefore competitively) if they can be sure that they are filling their vehicles almost to capacity. That imposes severe restrictions on the geographic range within which these services can offer competitive quotes, particularly for next-day delivery.

1.7 Only the express services industry can offer a fully integrated service from door-to-door, at competitive rates, which meets the needs of Italian businesses. The typical express delivery has six phases:

• Collection from the source

• Transportation to the local distribution centre

• Forwarding to the hub distribution centre

• Passing through relevant customs and security/screening procedures

• Transportation to the distribution centre close to destination

• Delivery to the final destination

1.8 The express industry offers an integrated service that controls all six of these phases at a competitive rate, with guaranteed next-day delivery to most European and US destinations. For its customers, the express industry simplifies and speeds the process of transporting goods. It organises collection, usually at the end of the business day, allows the sender access to information on the progress of shipments from pick-up to delivery and provides proof of delivery. Where shipments cross international borders, the express industry handles customs clearance as well as the payment of duties and taxes as required, often benefiting from expedited electronic customs procedures.

1.9 Four companies – DHL, FedEx, TNT and UPS, also referred to as ‘integrators’ – are the leaders of the global express industry, but there are many others in this highly competitive sector. The term ‘integrator’ refers to the ability of these companies to offer door-to-door integrated international services, where the company maintains effective control over all aspects of the distribution process, with each item being tracked at every step throughout its journey. The Associazione Italiana Corrieri Aerei Internazionali (AICAI) comprises the four integrators, together with SDA Express Courier and Skynet.

1.10 To meet the requirements of business in Europe, the express industry relies on overnight transport to use the ‘dead time’ from when a company hands over its shipment late in the working day to delivery to the recipient early the following day. Express transportation is achieved by using a variety of different transport modes; lorries, vans, trains, passenger aircraft and freight aircraft as well as on-foot delivery can all form part of the journey of a package from the sender to its recipient. Where possible, though, the express industry uses surface transport modes. Air express services are only used where there are no other options available to meet same day and next-day delivery requirements.

1.11 The companies in the express industry are no longer just providers of a service used by many companies, but are often partners of those companies, working together for mutual benefit. For some companies, members of the express industry organise all aspects of their distribution process.



1.12 A key part of the operation of the express industry is the distribution centres that are typically located close to the hub airports. These centres provide local employment and also provide positive spillover benefits for local businesses as a result of the improvement in the local transport infrastructure that is often associated with the development of a distribution centre. In Italy, the express industry has important employment centres in the airports at Bergamo, Milano, Bologna and Roma.

1.13 The express industry initially developed in the United States and flourished following the deregulation of air cargo services in the USA during the late 1970s. It has developed from the delivery of documents and parcels to specialist items such as high-tech products, semiconductors and general airfreight commodities. Typically, the types of goods transported by express services are high-value / low-weight items such as electronic components, designer fashions and pharmaceutical products. Documents now account for only around 25% of express shipments in Italy.

1.14 The OECD estimates that goods transported by air account for 3% by weight of all goods transported globally, but 40% by value. Express services represent a substantial proportion of this international trade.

Development of express services in Italy 1.15 Express services were introduced to the Italian market in the mid-1980s. Up to that

time documents and parcels were handled either by the postal service or freight forwarders. These service providers failed to meet the needs of the market for time-definite, guaranteed delivery, which had already been established by the integrators in the USA and elsewhere as a core focus of their business.

1.16 In 2002 the express industry transported around 121 million express shipments to, from and within Italy. Of these, just over 9 million (8%) were international inbound, 17 million (14%) were international outbound and almost 95 million (78%) were domestic shipments. The large number of domestic shipments in Italy partly reflects the structure of the economy, which is dominated by small firms. Many entrepreneurs own a number of small firms, and express services are used to move packages between these related operations.

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1.17 Charts 1.1 and 1.2 show the growth in express shipments from 1992 to 2002. The fastest growing segment of the market was international inbound consignments that achieved an average growth rate of over 21% a year between 1992 and 2002.

1.18 Next-day delivery is the most important type of express delivery, now representing around 60% of the total revenues of the express industry compared with just over 50% in 1995 (Table 1.1).

Table 1.1: The express industry’s revenues and shipments by category

Revenue breakdown by delivery (€ million) As % of total revenues

Next-day Deferred Other Total Next-day Deferred Other

1995 547.5 509.6 16.8 1073.9 51.0 47.5 1.5

2002 1302.3 894.5 5.8 2202.6 59.1 40.6 0.3

% change, 1995-2002

137.9 75.5 -65.5 105.1

Shipments breakdown by delivery (millions) As % of total shipments

Next-day Deferred Other Total Next-day Deferred Other

1995 22.8 48.9 2.1 73.8 30.9 66.2 2.9

2002 51.0 69.8 0.1 120.9 42.2 57.7 0.1

% change, 1995-2002

123.7 42.7 -95.2 63.8



The size of the express industry in Italy 1.19 The express industry is not separately identified in the National Accounts produced

by Istat. As a result, the scale of the industry and its direct contribution to Italian GDP, employment and government finances are not well understood. We have therefore undertaken a survey of six leading express companies that are members of AICAI to quantify the size and reach of the industry. Together, these companies estimate that they account for just over half of the domestic express market and nearly four-fifths of the international express market. We have grossed up the results of our survey of AICAI members on the basis of these shares in both the domestic and international markets to estimate the size of the overall Italian express industry and its growth over the last decade or so.

1.20 It should be emphasised that the estimates presented here are of the size of the express industry itself in Italy: as noted earlier, they make no allowance for the output, jobs etc that the express industry encourages in other sectors of the economy. Those impacts are discussed in other Chapters in this report.

(i) The direct contribution of the express industry to Italian sales and output 1.21 Total sales revenues (ie turnover) of the express industry is estimated to have been

€2.2 billion in 2002. While the express industry itself is a small part of the economy, it has been growing very rapidly. Stripping out the effects of inflation, the express industry’s turnover has risen 69% in real terms since 1995 and over 160% since 1991. As a result, the share of the express industry in Italian gross output has more than doubled since 1991, as the express industry has grown much faster than the whole economy.
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1.22 The direct contribution of the express industry to Italian GDP is measured by its so-called ‘value-added’. We calculate this using information provided by the express operators on the value of their sales less the value of the intermediate purchases they buy from supplier industries (eg fuel, packaging materials etc). On this basis, we estimate that the value-added of the express industry – its direct contribution to GDP - was about €634 million in 2002. This means that the express industry makes a direct contribution to Italian GDP similar to the motor vehicle bodies manufacturing sector.

(ii) The direct contribution of the express industry to Italian employment 1.23 The express industry supports over 24,000 employees, with around 8,700 of these

jobs in firms that are sub-contractors to the main express companies. This means that it is a larger employer than, for example, the Italian computer manufacturing sector. Over 85% of workers in the express industry are employed on a full-time basis, which is higher than the national average.

1.24 The express industry’s employees are widely spread across Italy. Relatively few jobs in the express industry are based at airports (just 6% of the total).

1.25 The express industry provides work for people with a wide range of skills. Of those employed by the express companies, around 43% are involved in sorting and delivery; around 25% in administration; another 25% in sales; with the remainder either engineers/technicians or in management positions.

Table 1.2: The size of the Italian express industry

1995 2002 % increase, 1995-2002

Turnover (2002 prices) €1.30 billion €2.20 billion 69.2%

Value-added €634 million

Employment 14,332 24,065 67.9%

Employment by Region:

North West 13,154

North East 4,015

Central 5,755

South and Islands 1,141

Employment at Airports

Bergamo 754

Milano 299

Roma 120

Bologna 107

Other 246



(iii) The contribution of the express industry to Italian taxes

1.26 We estimate that the express industry contributed about €334 million to the Italian Treasury in 2002. This is equivalent to about 0.1% on personal income tax.

1.27 Of this, some €110 million came from income tax and social security contributions, €25 million from corporation tax, €196 million from VAT and a further €3 million from other taxes.

Which industries use express services? 1.28 The services provided by the express industry are used by companies across the

spectrum of Italian business. But we have analysed the top 50 customers of the express companies who are members of AICAI to identify which sectors are the heaviest users of express delivery services. These customers account for around 25% of AICAI members’ revenues from domestic shipments and 13% of revenues from international shipments.

1.29 The breakdown of these customers by sector is shown below. For domestic express the most important client sectors are IT, electronics and telecoms (which account for 25% of total revenues), business services (20%) and health and medical products (12%). On the international side, the most important client sectors are textiles and leather goods (26% of revenues), the auto industry (17%), and engineering (16%).

Table 1.3: Breakdown of main client sector of the express industry

% of revenues accounted for by different client sectors

(Sectors are ordered by their share of domestic revenues)

Domestic International

Electrical equipment (including IT and telecoms) 25.1 7.9 Business services & communications 20.0 6.0

Health & medical products 11.8 1.4 Financial services 8.5 3.4

Autos & transport equipment 7.8 16.6 Textiles & leather goods 7.3 26.2

Engineering 4.8 16.4 Retail trade 4.0 - Energy 3.8 7.9

Food, beverages & tobacco manufacturing 2.4 2.0 Other manufacturing 2.2 4.1

Optical equipment 1.3 3.4 Government/official services 1.0 2.8

Chemicals & plastics - 1.9



Conclusions 1.30 The express industry is one of the fastest growing industries both globally and in

Italy. It makes a significant direct contribution to Italian GDP, employment and the Treasury. But its most important role is in facilitating the success of other parts of the Italian economy, which is the subject of the remainder of this report.



2 The Role of the Express Industry in Facilitating Italian Trade

Introduction 2.1 In this Chapter, we begin our analysis of the contribution that the express industry

makes to the Italian economy through the impact it has on the performance of companies in other parts of the Italian business community.

2.2 In part, this reflects the purchases that companies active in the express industry make from their suppliers and the jobs supported by the spending of the people who work in the industry. But the express industry contributes to the long-term growth potential of the Italian economy in more dynamic ways. In particular, express delivery services are increasingly important to ensuring the continued competitiveness of Italian companies, and so to winning export markets and encouraging investment.

2.3 The focus of this Chapter is on the role of express delivery services in international trade, and its importance to ensuring that Italy benefits fully from the European Single Market. We also discuss the role of express services in the delivery of time-sensitive goods. Subsequent Chapters discuss the importance of the express industry to Italian productivity and investment, and to the new economy.

Key Findings: The proportion of Italian exports delivered by express services has doubled

since the early 1990s, and is set to increase further as rapid, guaranteed delivery to the US and emerging economies becomes an increasing determinant of Italian competitiveness.

54% of Italian companies report that there are aspects of their delivery commitments to clients for which next-day delivery services are very important.

18% of Italian companies consider next-day delivery services to be important because their products are perishable/time-sensitive.

56% of Italian companies rely on next-day delivery because their customers demand it to meet their streamlined production processes, while a further 25% have customers who demand next-day delivery of spare parts for machinery and equipment.

The role of the express industry in international trade 2.4 The Italian economy is very dependent on international trade. As Chart 2.1 shows,

Italian exports of goods and services have risen twice as fast in real (ie inflation-adjusted) terms over the last 30 years than overall GDP. As a result, the share of exports in Italian GDP has risen to around 27% now compared with only 17% in 1973 (Chart 2.2). At the same time imports into Italy have also risen rapidly – from 19% in 1973 to about 26% now.

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Chart 2.1

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2.5 Rapid growth in international trade is by no means a phenomenon of only the last few decades – for example, world trade in manufactured goods increased eight-fold between 1950 and 1973. But the absolute volume increase in world trade since the mid-1970s has been over four times that over the previous 25 years, driven by: The gradual removal of barriers to international trade - including the creation of

the European Single Market and the widening influence of the World Trade Organisation.



Globalisation – as new markets have opened up and more companies have established international operations, including both trading activities and the establishment /acquisition of foreign subsidiaries.

Increased specialisation – encouraging countries to focus on the activities in which they have a comparative advantage, and trade with other countries that have an advantage in the production of other goods and services.

Global communications – enabling companies to market their products around the world, and liaise with customers and suppliers in other countries.

More favourable political background – allowing, most notably, increased trade with China and former communist countries.

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2.6 OEF’s global forecast shows these trends continuing, with world trade increasing by

over 90% over the next decade compared with a rise of just under 40% in world GDP (Chart 2.3). The accession of the Central European countries to the EU in May 2004 should stimulate increased trade within Europe. For example, it is likely to encourage increased investment by Italian companies in these countries. As a result, there are likely to be increased flows of investment and intermediate goods from Italy to the accession countries, and increased flows of finished manufactured products from the accession countries to Italy.

2.7 The Italian economy’s increasing reliance on trade means that it is also increasingly dependent on efficient and competitive means of both delivering its exports to their destinations and bringing in imports from other countries. There are a number of aspects to such services that are important: Speed: For some organisations speed to market is even more important than

cost in determining their competitiveness. This is obviously vital for perishable



goods, such as pharmaceutical test materials (see Case Study 2). But it is also important, for example, for firms meeting orders to strict delivery dates or having to respond immediately to customer demand (ie the so-called ‘Day+1 economy’).

Reliability: The reputation of Italian exporters can be undermined if their deliveries fail to arrive with customers on time or are lost in transit.

Destinations served: With trade growing most rapidly in the so-called emerging economies, particularly in Asia, the ability to ship products to and from an increasing number of countries cost-effectively and quickly – ie ‘connectivity’ - is also important.

Chart 2.4

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2.8 Italian companies use a variety of means to transport goods to and from abroad, including road/rail and ferry, sea-freight and airfreight. But express delivery services – which represent the ‘business class’ of the freight transport market, focused on providing fast, highly reliable delivery – are becoming increasingly important. The express industry is able to offer delivery from Italy to countries representing 90% of the world’s GDP in 24-48 hours.

2.9 Express services are typically used for delivering relatively high-value/low-weight products. Data from Istat suggest that air transport is used to carry just 0.4% of Italian exports by weight but 10.7% of exports by value. On the basis of the information provided by the six leading express companies in AICAI, we estimate that the express industry accounts for more than half of these exports by value.

2.10 The benefits that express delivery offers to Italian trade have resulted in the number of outbound express shipments rising 1½ times as quickly as the volume of Italian exports of goods since 1995, while the number of inbound shipments have risen 3 times faster than imports (Charts 2.4 and 2.5).

2.11 The importance of the express industry in Italian trade is highlighted by the results of our survey of Italian companies. As explained in the Introduction to this Report, we conducted a detailed survey of 150 companies across all sectors of the Italian economy on their use of express delivery services.

2.12 This survey firstly provides insight into the sorts of packages Italian companies are sending by express delivery. As Chart 2.6 shows, 26% of respondents frequently use express delivery for sending products to customers, while 17% do so occasionally. And 24% are either frequently or occasionally using express delivery for sending sub-components to other production facilities. This compares with 80% and 87% using express delivery frequently or occasionally for legal documents and distributing reports within the company. But as noted in Chapter 1, general shipments now account for 75% of total express shipments. Documents account for only 25% of shipments.


0102030405060708090

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Sending productsto customers

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other productionfacilities

Legal documents Distributingreports within the

company

0102030405060708090100

Occasionally

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% of respondents * % of respondents *

Package types delivered by express services

* employment-weighted

Chart 2.6


2.13 Our survey also sheds light on the reasons why companies use express services rather than alternative means of delivery. As Chart 2.7 shows, almost all consider the need for guaranteed delivery to be very important. 83% of respondents report that next-day delivery is very important. And 70% of firms report that the need to be able to track the location of products en-route – a particular specialisation of express operators – is very important (see Case Studies 1, 3 and 4).

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Very important Sometimes important% of respondents * % of respondents *

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2.14 Delivery to foreign destinations represents almost 60% of the express industry’s revenues from next-day delivery services. Of these, around 46% are accounted for by deliveries to the rest of the European Union compared with 22% for deliveries to the US and 11% to Asia. Express services are used disproportionately for exports to countries outside the EU.

AICAI

% …

Chart 2.8

Where do express shipments go? of next-day revenues accounted for by shipments to

Chart 2.7

January 2004 20

Italy42%

EU27%

US13%

Asia6%

Other12%


Chart 2.9

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Destinations to which express parcels are sent


2.15 This pattern of destinations to which express shipments are sent is mirrored in the results of our survey of Italian companies. As Chart 2.9 shows, 97% of respondents report that they frequently send express shipments elsewhere within Italy. However, around 60% report that they frequently use express for delivery to at least one other EU country, while 43% frequently send to North America, 40% to Eastern Europe and 30% to Asia. Relatively few respondents frequently send shipments by express delivery to Latin America, Africa or Australasia, but over 50% do so at least occasionally.

2.16 This analysis highlights: Express delivery accounts for an increasing proportion of Italian exports and

imports.

The next-day and guaranteed delivery aspects of express services are particularly important to Italian companies.

With over 50% of Italian exports to the rest of the EU, express services are important if Italy is to benefit fully from the additional trade stimulated in the EU from the creation of the Single Market and Monetary Union, and from its expansion into Central Europe.

But express services are also used significantly to deliver goods to other destinations, including the US and the emerging economies, which are generally expected to see the fastest economic growth over the next 10-20 years and therefore are likely to be Italy’s fastest-growing export markets.

The role of express services in trade in time-sensitive goods 2.17 As we have seen, over 80% of companies using express services do so because

they value the speed of delivery provided, and almost 60% of the express industry’s revenues are from next-day deliveries as opposed to deferred services.



2.18 Our survey asked Italian companies whether there are aspects of their delivery commitments to clients for which next-day delivery services are very important. 54% of all respondents reported that there are (Chart 2.10). The proportion was 100% for firms in the textiles & clothing and pharmaceuticals/chemicals sectors.

Chart 2.10

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* employment-weighted % of respondents reporting next-day delivery is important

2.19 Of the companies for which next-day delivery is very important, 18% report that this is because their company’s products are perishable/time-sensitive (Chart 2.11). This includes companies in the chemicals, electrical engineering and business services sectors. 56% of firms consider next-day delivery to be sometimes very important because their customers are using streamlined production processes, while 25% have customers who need next-day delivery of spare parts for machinery and equipment. Respondents also reported that next-day delivery is important where, for example, they are finalising contracts, making legal submissions, or conducting tests on sensitive materials.

Case Study 1: Telecommunications Company

We interviewed a company in mobile telephony that relies on express services to feed its network of shops and distribution outlets in Italy. Express services are also used to provide assistance to customers whose handsets are faulty or damaged.

The company considers express services to be critical to meeting rapidly expanding demand without keeping large stocks of expensive items. Similarly, its dealers appreciate having access to reliable supply without the costs involved in holding stocks. Customers expect their orders to be met within 24 hours, even at very busy times of the year (eg Christmas), and express delivery is essential in meeting this requirement.

As a result, the company has developed a very close relationship with an express company, on which it relies for its logistics and transportation. It particularly values both the high security standards that the express company has put in place for its operations, and the ability to track orders in transit.



2.20 We have undertaken a number of detailed case study interviews with companies who use express services to transport time-sensitive products. These highlight: A very large proportion of Italian business is time-sensitive – not just companies

making perishable products, but many who will lose orders or fail to close important negotiations if their products or contracts arrive late. Particular examples include:

- A telecommunications company whose customers regard 24-hour delivery as vital (Case Study 1).

- Express services are vital in the pharmaceutical sector for transporting materials to be tested quickly and safely to laboratories. Moreover, express services allow these companies to centre their operations in Italy while still serving a global market in perishable materials (see Case Study 2).

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Why is next-day delivery important?

* employment-weighted % of respondents reporting next-day delivery

is important because...

Case Study 2: Multinational Clinical Diagnosis Business

We interviewed a company supplying diagnostic analysis and instruments across Europe from its site in northern Italy. It relies on express services because speed of delivery is vital – most of its products need to be kept refrigerated, while spare parts for diagnostic instruments are required urgently by hospitals and medial laboratories. Moreover, most of its customers operate a just-in-time inventory system and being able to respond promptly to an order gives the company an advantage over its competitors. The company also attaches great importance to the careful handling of its products in transit.

Chart 2.11

Conclusions 2.21 This Chapter has highlighted the increasingly important role that the express industry

plays in Italian trade. With the Italian economy becoming more dependent on trade, and its fastest growing markets likely to be in the US and emerging economies (most notably in Asia), the fast, reliable and cost-effective services offered by the express industry will become even more important to the competitiveness of Italian business.



2.22 The importance of express services is further underlined by the growing time-sensitivity of the Italian economy. Being able to respond quickly to customer demand – for new products, spare parts, contracts etc – is essential to winning and maintaining business in an increasingly competitive global economy.



3 The Role of the Express Industry in Facilitating Productivity and Investment

Introduction 3.1 In this Chapter, we continue our analysis of the contribution that the express industry

makes to the Italian economy through the impact it has on the performance of companies in other sectors by considering its role in determining productivity and investment.

3.2 We begin by discussing the role of express services in the adoption of efficient production processes by Italian companies. We then consider the importance of express services to firms seeking to minimise their inventory costs. We also discuss the importance of express services to Italy’s small and medium-size enterprises (SMEs), and their impact on regional development and foreign direct investment in Italy. Finally, we estimate the “indirect” and “induced” employment supported by the activities of the express industry.

Key Findings: The large majority of Italian companies require their suppliers sometimes

to deliver certain packages to them by express delivery. Around 25% frequently require either sub-components or spare parts next day.

Over 30% of Italian firms would possibly have to hold increased inventories if next-day delivery were no longer available, increasing their costs.

The express industry enables small companies to utilise high quality, rapid delivery services which they could not provide themselves. 80% of SMEs expect that they would lose some export orders if next-day international delivery were no longer available.

Good access to markets is the most important factor influencing international location decisions. Without international next-day delivery 42% of large Italian firms and 26% of SMEs would possibly have to relocate some operations overseas.

Allowing for impacts through the supply chain, the express industry helps to support at least 47,000 jobs in Italy.

The role of express services in enabling efficient production 3.3 As well as using express services to deliver products to their customers, many

companies in Italy also rely on express services in order to organise their production operations as efficiently as possible. Our survey of Italian companies suggests that the large majority of firms require their suppliers sometimes to deliver certain packages to them by express delivery.

3.4 Chart 3.1 provides details on the sorts of packages firms receive from suppliers by express delivery. It shows that 52% of our survey respondents either frequently or occasionally require spare parts to be delivered by express services, while 62% do so for delivery of sub-components to their production facilities. Not surprisingly, the



proportions are even higher for manufacturing companies, at 61% and 86% respectively.

3.5 83% of companies report that they also either frequently or occasionally require legal documents to be delivered by their suppliers using express services, while 77% use express services to distribute reports within their company (eg accounts, confidential reports to directors).

Chart 3.1

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What sort of shipments do you have delivered by express services?


Case Study 3: On-Line Fashion Outlet

We interviewed a company that buys designer clothing, footwear and accessories from retailers and fashion companies at the end of the sales – summer and winter – and then sells them on-line. Its main markets are Italy (over 40% of turnover), Germany, UK, France, Spain and, since mid-2002, the US.

This company relies on express services for all its deliveries and has developed a strong relationship with a leading express company. Fast guaranteed delivery is important to ensuring customer satisfaction and to providing a competitive advantage over its rivals. The company’s clients particularly value being able to track their orders in transit over the internet.

Case Study 4: Multinational Publishing Group

We interviewed a company that uses express services to send publications from Italy to all over the world and to send artwork to publishers who are developing new titles. This company values the global reach of express delivery services and considers them crucial to overcoming delays in the production process so that deadlines can be met. It also values both the responsibility express companies take in handling customs procedures and the ability of its clients to track their orders in transit.

In principle, it may be possible for some of the artwork distributed by this company to be sent by digital file over the internet. However, this is generally not possible because of the size of the files involved and is less secure than using express delivery.



3.6 It should be stressed that it is not only companies in the manufacturing sector that rely on express services to maximise their efficiency. It is also important to firms in the service sector too. The case studies present a number of examples illustrating how firms rely on express services to maximise their efficiency.

3.7 According to our Case Studies, express services allow firms to plan against contingencies such as delays in the arrival of spare parts for production or raw materials without necessitating breaks in the production process or delays in bringing products to market (see Case Studies 5 and 6).

3.8 The Case Studies also reveal the vital role that express services play in facilitating just-in-time inventory management (see Case Studies 7 and 8).

The role of express in reducing companies’ inventory costs 3.9 47% of all firms replying to our survey of Italian companies report that there are

aspects of their production process for which next-day delivery of sub-components from their suppliers or elsewhere in their companies is very important (Chart 3.2). The proportion is even higher for manufacturing companies, at 78%. Of these firms, around a third report that next-day delivery of sub-components is important because they operate a just-in-time (JIT) inventory system, while the large majority require urgent delivery of spare parts for machinery in case of breakdown. Other reasons for needing sub-components on a next-day basis mentioned by respondents include getting samples to be approved before production processes can begin at their sites.

3.10 It is clear from our survey and case studies that JIT inventory controls are now increasingly important in Italian industry, and that these have created strong demand for express delivery services. Under JIT, an increasing number of firms hold only very limited ‘buffer’ inventories in case they run short of critical sub-components or spare parts. Instead, they require their suppliers (which may be other parts of their business) to deliver to a strict timetable to fit in with the production runs.

Chart 3.2

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Why? Just in time Why? Spare parts forbreakdown

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% saying yes



3.11 In order to illustrate the role of the express industry in helping firms to minimise their inventory costs, our survey asked firms how they would react if next-day delivery services to or from Italy to foreign locations were no longer available. As Chart 3.3 shows, 15% reported that they might have to hold increased inventory at their Italian site in order to meet the requirements of their production process, while 31% reported that they might have to hold increased inventory to meet customer demand.

Chart 3.3

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Hold increased inventories for production

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Case Study 5: Electronics Manufacturing Services (EMS) Company

We interviewed a company specialised in providing logistics, design and development services to the OEMs (Original Equipment Manufacturers) market. Managing the whole product life cycle is paramount for this company in order to offer its customers faster time-to-market, reduced inventories, and flexibility and responsiveness to changing market conditions. Express services are used to cope with delays that could disrupt the manufacturing process and/or distribution of final products.

In particular, the company’s global supply chain suppliers rely on express services when they are late in delivering some components. In its turn, the company uses express services to deliver the final products to its own customers when there are delays in the production cycle. Express services are therefore seen as an important part of the company’s contingency planning.

The company expects its use of express services to increase as more of its production sites will in future be located in Asia, and as the trend continues towards the outsourcing of a number of services from OEMs, including repairs which require rapid delivery of spare parts.

Case Study 6: Designer Clothing and Luxury Goods Group

We interviewed one of Italy’s leading groups in the clothing and luxury goods sectors, employing over 1,200 staff in both production facilities and retail stores.

The group uses express services in both its production and distribution activities. While it has its own vehicles for delivering materials to its contractors, express services are crucial in bridging delays in theproduction and transport cycle, and so avoiding costly breaks in operations – for example, in delivering buttons, zips and other components that were not available when the company’s vans were making their deliveries. Express services are also important in overcoming bottlenecks during the particularly busy times in a season, and in ensuring that clients’ expectations on delivery are met (particularly when there have been delays in the production process).



3.12 Our survey suggests that, if international next-day deliveries were withdrawn, firms would, on average, have to increase by 3.4% their inventories of intermediate goods to meet the requirements of the production process. As Chart 3.4 shows, some firms would have to increase their inventory holdings by considerably more.

Chart 3.4

0123456789

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% of respondents * answering: % of respondents * answering:

By how much would inventories of intermediate goods have to increase if next-day deliveries were not

available?


% increase in inventories to meet requirements of production process

3.13 Similarly, our survey suggests that, if international next-day deliveries were withdrawn, then Italian companies’ inventories of finished goods would have to increase by 5% on average in order to ensure that consumer demand could be promptly met. Again, as Chart 3.5 shows, some firms would have to increase their inventories by substantially more than this – possibly by over 50%.

Chart 3.5

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By how much would inventories of finished goods have to increase if next-day deliveries were not available?


% increase in inventories to meet customer demand



3.14 As well as increasing costs because inventory holdings have to increase, the loss of international next-day delivery would also mean interruptions to the production process. Our survey respondents expect that, on average, production would be interrupted on more than 3 days per year because spare parts for equipment could not be delivered next-day when needed. Some firms believe that their production might even be seriously affected on more than 20 days a year (Chart 3.6).

Chart 3.6

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number of days a year the production process would be interrupted

3.15 The loss of next-day delivery would also mean lost orders – primarily from export markets – because of longer delivery times. On average, our survey respondents expect that they would lose 4.5% of their orders if there were no international next-day delivery. But some firms report that they could lose as much as 30% of their orders (Chart 3.7).



Chart 3.7

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3.16

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3.20

Case Study 7: Global Manufacturer

We interviewed a large manufacturing company with a main production and distribution site in North-West Italy, and two smaller production sites and a number of distribution centres around the country.

The company reorganised its distribution network in the 1990s and it now relies on five warehouses in Europe linked by a team of lorries. In general, this system works well. But express services are used for ‘after-hours deliveries’ – ie for orders that are received too late to be delivered by the company’s lorries. Without express services, the company would have to have more storage space and hold higher levels of stocks in Italy to provide for contingencies.

3.16 It should also be stressed that express delivery reduces companies’ costs in a number of other ways, such as:

Facilitating build-to-order techniques – for example, of clothes since time savings on delivery can be used to allow customisation to match particular client requirements.

Enabling the fast handling of returned goods, either saving on inventory time if they can be resold or protecting firms’ reputations by allowing repairs to be made quickly to faulty products.

The importance of express services to SMEs 3.17 The vast majority of Italian firms are Small and Medium Size Enterprises (SMEs – ie

firms with less than 250 employees). The average size is 3-6 employees per firm (excluding banks and insurance). Almost 60% of employees are in companies with less than 20 staff, while 48% of firms have less than 10 staff. According to some estimates, SMEs account for almost 60% of Italian exports.


3.18 Our survey of Italian companies suggests that SMEs are substantial users of express delivery services. For example, 56% of SMEs frequently send parcels elsewhere in Italy and 65% frequently send parcels to the EU by express delivery. And over the


last 5-10 years, 48% of SMEs report that their use of express services has increased.

3.19 Without next-day international express delivery, 80% of SMEs report that they would probably lose some export orders. And 59% report that they would need to hold more product inventory to meet customer needs (Table 3.1).

Table 3.1: The importance of express services to SMEs1

Unweighted % of firms … SMEs Large Companies

Using express services frequently to deliver in Italy 56 89

Using express services frequently to deliver to EU 65 35

Using express services frequently to deliver to US 6 19

Reporting increased use of express services over last 5-10 years 48 53

Reporting loss of next-day international services would probably mean

Lost orders because of longer delivery times

Need to hold more product inventory to meet customer needs

80

59

88

50

1SMEs are firms with less than 250 employees

3.20 Express delivery services are important to SMEs because they typically do not have the same transport delivery infrastructure that large companies have in place. While the scale of large manufacturers, such as the motor vehicle producers, makes it economic either for them to run their own transport fleet or buy-in dedicated services from a contractor, this would be uneconomic for most SMEs making relatively few and irregular deliveries. SMEs therefore frequently rely on transport services where a central provider delivers on behalf of a large number of customers.

3.21 The express industry enables SMEs to take advantage of the economies of scale its large-scale transport operations generate, while at the same time providing the same high quality of service – speed, reliability, tracking – provided to large companies. Moreover, the express industry allows the many small firms in Italy that are part of a network (eg owned by a single entrepreneur) to transport products between operations quickly and efficiently.

The importance of express services to Italian regional development 3.22 We noted in Chapter 1 that the employees of the express industry are widely spread

around Italy, although there is some concentration around Milan, Bergamo, Bologna and Roma, associated with the use of those airports as key hubs for express services. But the express industry contributes to regional development in a number of other ways as well:



It enables businesses dependent on fast delivery to customers to locate in regions that are not necessarily close to their market, for example in the Mezzogiorno or Sicily.

Companies who rely on next-day delivery to customers may have an incentive to locate near hubs for express services so as to make the last pick-up time for their deliveries as late as possible, providing them with maximum production flexibility. The box describes such clustering around the major express hubs in the US and continental Europe, including around Bergamo airport. However, further such development is limited near the main airports in Northern Italy given the constraints on space for new companies to locate.

Express hubs as a spur to regional economic development

(i) Memphis

Memphis International Airport has been the world's largest cargo airport for the last six years, due to the presence of Federal Express' world headquarters and Superhub.

In addition to the jobs and direct economic benefits it provides, FedEx is a magnet for attracting distribution centre development to Memphis. According to SRI International more than 130 foreign-owned firms from 22 countries employing 17,250 workers have been drawn to Memphis since the early 1980s, largely due to the presence of FedEx. From 1995-2000, company relocation and expansion projects in Memphis by FedEx customers generated nearly 10,000 new jobs; over 12 million sq.ft of new space; and over US$710 million in new investment in the region. Examples of customers that relocated to Memphis metro area include Williams-Sonoma (distribution & data center); Submitorder.com (Internet fulfilment center); Hewlett Packard (Distribution) and Ingram Micro (Distribution / assembly / repair).

(ii) Louisville

Louisville Airport is home to the international airfreight hub of United Parcel Service. Many companies have located in or near Louisville because of the extensive logistics and distribution opportunities there.

According to Greater Louisville Inc. The Metro Chamber of Commerce, the estimated annual impact of UPS’ Hub 2000 expansion was 13,965 new jobs (direct and indirect) and $478 million new payroll (direct and indirect). Companies doing e-commerce fulfillment in Greater Louisville include Nike and Gateway Computers, while companies doing traditional transportation fulfillment include GE and Ford.

(iii) Liege

Airfreight traffic at Liege Airport has grown from 353 tonnes in 1994 to 273,217 tonnes in 2001, boosted by the establishment of TNT’s European operating hub in 1998.

As express and air cargo traffic has grown, so a number of distribution and logistics companies have established in the close vicinity of the airport. These companies are located within the Liege Logistics platform: Liege Logistics now employs over 500 people.

Around 845 acres have been designated on and bordering the current airport site to enable Liege Airport’s economic growth through to 2020. It is envisaged that around 125 acres will be required to facilitate the growth of existing airport operators; an additional 405 acres adjacent to the airport zone will be made available for companies needing to use the airport’s infrastructure and whose business requires a certain proximity and direct access to the airport. Around 315 acres will be available for varied economic activity for smaller-sized concerns.

(iv) Bergamo

The merchandise traffic growth of Bergamo Orio al Serio Airport has coincided, in the last 15 years, with the steady DHL Hub development for Italy and southeast Europe. With more than 115,000 tons in transit during 2002, the total volume of the airport has increased more than fivefold in 10 years.



Thanks to the expansion of the air and road DHL network, joined with the activities of BGY hub, Bergamo quickly became the third most important Italian airport for goods (after Milano Malpensa and Roma Fiumicino) and the leading airport for courier traffic. Research on behalf of AICAI found that in 2001 the activities carried out in the Bergamo hub helped to create more than 2,000 jobs, with the total value of production boosted by more than €30 million.

(v) Brussels

In 1985, DHL established the Brussels hub as a sorting facility in the corner of a hangar at Brussels National Airport. Within a few years it became DHL Brussels Hub, the largest express hub outside the USA. Today, the DHL BRU hub employs more than 2,500 staff and it is estimated that another 10,000 indirect jobs have been created thanks to its presence. Through its Express Logistic Centre (ELC), the hub acts as a central distribution point for a number of major companies based in the surrounding areas of the Brussels National Airport. DHL is not only the biggest customer of Belgocontrol (providing more than 25% of their income) but also contributes more than 50% of the profit before taxes of the airport owner BIAC. According to a report issued in September 2003 by the Vlerick Leuven Management School and K U Leuven Universite Libre de Brussels and ECORYS Transport Rotterdam, the presence of DHL’s major hub at Brussels National Airport contributes €394 million of value-added to the Belgium economy.

The role of express services in facilitating foreign direct investment 3.23 Italy has been rather less successful than many EU countries in attracting foreign

direct investment (FDI). However, it attracted an average of about $14.25 billion of inward investment a year over the last three years, more than three times the average it achieved over the previous decade. Inward investment brings with it important benefits to the recipient, most obviously in terms of increased employment and output but also in the transfer of technology and new management techniques.

3.24 A wide range of factors influence firms’ decisions about how much and where to invest. However, surveys of international investors suggest that ease of access to markets and transport links are particularly important. For example, Table 3.2 presents the results of a survey by Healey & Baker. This shows that 58% of companies consider easy access to markets, customers or clients, as “absolutely essential” when deciding where to locate their business, making it the most important influence on company location decisions. And transport links with other cities and internationally are the third most important factor, with 56% of respondents considering them absolutely essential.

3.25 Express services are an important element in ensuring that companies based in Italy have the best possible access to markets. Our survey of Italian companies shows that foreign direct investment would be vulnerable if next-day delivery to or from Italy were no longer available: 42% of large companies and 26% of SMEs report that they would possibly have to relocate some operations from Italy to an overseas location. We return to this issue in Chapter 6.

3.26 Our survey suggests that operations would be most likely to relocate to Germany or the US if international next-day delivery in Italy were withdrawn (Chart 3.8). It would also be likely to encourage even more firms to relocate some of their production from Italy to the accession countries of Central Europe who will join the EU in 2004.



Table 3.2: Essential factors for locating business

% of respondents reporting factor as “absolutely essential” 2002 2003

Easy access to markets, customers or clients 57 58

Availability of qualified staff 59 57

Transport links with other cities and internationally 51 56

Quality of telecommunications 46 49

Climate governments create for business through tax and the availability of financial incentives

34 33

Cost of staff 32 35

Value for money of office space 30 31

Availability of office space 27 26

Ease of travelling around within the city 21 24

Languages spoken 20 24

Quality of life for employees 18 15

Freedom from pollution 12 14

Source: Healey & Baker

Chart 3.8

Germany52.5%

Other Europe17.2%

Rest of World1.0%

US29.3%

To which other country would operations have to relocate?



The express industry as a supporter of jobs along the supply chain 3.27 In Chapter 1, we estimated that over 24,000 workers are employed directly by the

express industry. However, this does not represent the overall number of jobs supported by the express industry in Italy. In addition, there are:

The jobs in companies supplying goods and services to the express industry – so-called ‘indirect employment’ – including those working in: commercial and cargo airlines employed by express operators; the aerospace industry building engines for the aircraft operated by express companies; the automotive industry building delivery vehicles; in companies supplying IT equipment and support services; in oil companies; accountants and lawyers; etc.

On the basis of information provided by the integrators on their purchases from suppliers, and the input-output tables prepared by Istat, we estimate that the 24,000 or so direct jobs in the express industry generate an additional 13,500 indirect jobs in Italy through the supply-chain.

Employees in the express industry (whether directly or indirectly) use their income to purchase goods and services for their own consumption, and this spending then helps to support the jobs in the industries that supply these purchases.

Estimates based on simulations conducted on the Oxford Economic Forecasting Macroeconomic Model of the Italian economy suggest that this so-called ‘induced employment’ may be around 9,400 (ie about 25% of direct and indirect employment in the express industry). This does not mean that these additional jobs would not exist without the express sector, but they are likely to do so only at somewhat lower real wages and living standards for those workers.

3.28 Putting these different elements together implies that the express industry now helps to support at least 47,000 jobs in Italy, an increase of 68% since 1995. In addition, the express industry also helps to generate employment elsewhere in the economy by, for example, facilitating trade and investment in Italy and improving the efficiency of its client companies, as discussed elsewhere in this Report.

Table 3.3: Direct, indirect and induced employment supported by the express industry

1995 2002 Direct employment 14,332 24,065 Indirect employment 8,040 13,501 Induced employment 5,593 9,400

Total employment supported by express 27,965 46,966 % increase, 1995-2001 - 68%



Conclusions 3.29 This Chapter has highlighted how the services provided by the express industry are

now integral to business operations in Italy. It would make it rather difficult for firms to operate their streamlined production processes and just-in-time inventory management systems if they could not rely on next-day express delivery of sub-components or spare parts for their machinery and equipment. In the absence of international next-day express delivery many would face increased production costs as they would have to carry extra inventory or face disruption to either their production lines or deliveries to customers. For some companies, the impact this would have on their competitiveness would be so great that they might decide to relocate some operations outside Italy.



4 The Role of Express Services in Facilitating the New Economy

Introduction 4.1 The ‘new economy’ has been described as the ‘weightless economy’1, because it is

associated with the instantaneous transfer of knowledge-based products or services, which are high in value but low in physical weight. However, with the exception of a pure transfer of information, it should be remembered that even if the new economy means consumers can make a purchase electronically, without having to visit the physical site where the goods are stored or displayed, ultimately the goods have to be delivered nonetheless. That is where express services come in.

4.2 The ability to guarantee next-day or even same-day delivery of their products is a critical factor in the success of many firms in the new economy. In this Chapter, we explore the many ways in which express services facilitate the new economy. To do this, we draw on a number of case studies of high-tech or ‘new economy’ firms, and on the responses to our survey of Italian companies in that sector.

4.3 While many of the new economy sectors have suffered a sharp downturn in business over the last couple of years after the high-tech boom of the late 1990s, both the Confindustria and OEF forecasts suggest that these sectors will be among the fastest growing in the Italian economy over the next decade. These sectors typically also generate relatively high productivity. Ensuring that Italy is successful in the new economy will therefore be important to ensuring it achieves its economic potential.

Key Findings: Express services are particularly important for companies involved in the

new economy, who depend on their speed, security and reliability of transportation. Almost all of the new economy firms we surveyed report that there are aspects to their companies’ delivery commitments to clients for which next-day delivery services are important, compared to 54% across the economy as a whole.

Similarly, 95% of new economy companies we surveyed report that next-day delivery of sub-components is important to their business – principally because they operate JIT inventory systems – double the proportion across the whole economy.

Express services are essential for the smooth functioning of firms involved in e-business – likely to be a fast-growing sector into the foreseeable future.

Express services remove an important barrier to entry for new economy firms, giving them access to the transportation economies of scale previously only available to large, established enterprises.

Express services also play an important role in the propagation of international business best practice.


1 See Danny Quah, ‘Increasingly Weightless Economies’, Bank of England Quarterly Bulletin, February 1997; Diane Coyle, ‘The Weightless World’, Capstone, London & MIT Press, Cambridge, 1997.


What is the ‘new economy’? 4.4 What sort of industries should come under the heading ‘new economy’? For the

purposes of this Chapter, we define the ‘new economy’ as including: E-business/dotcoms

Information technology (IT) equipment and services

Mobile telephony

High-tech electronics / electronic components / semi-conductors

Pharmaceuticals / biotechnology

Research and development

4.5 Although most of the industries listed above are involved in moving physical products – however light – from one place to another, being part of the new economy means that the speed and reliability of that transfer are of the essence.

How do express services help new economy firms? 4.6 New economy firms make extensive use of express services. As we saw in Chapter

1, companies in the electrical equipment sector (including IT and telecoms) account for over 25% of the express industry’s revenues from domestic shipments and almost 8% of revenues from international shipments (Table 1.3). And firms in the business services and communications sector – which includes a number of high-tech companies – account for a further 20% of domestic revenues and 6% of international revenues.

4.7 The reliance of new economy firms on the express industry reflects the fact that fast and reliable delivery is a vital ingredient in their success, for a number of reasons: Express services make e-business feasible.

Just-in-time inventory systems are vital for new economy firms, whose products are often high in value and/or perishable or time-sensitive.

Speed and reliability in the transfer of products to market.

Global reach.

Barriers to entry.

The rest of this Chapter explores each of these factors in detail.

E-business 4.8 Recent years have seen a global explosion in e-business – a trend that looks likely to

continue into the foreseeable future, despite the recent downturn in the new economy sectors. Such is the competitive nature of their market place that firms involved in e-business cannot afford to hold excessive inventory; e-business firms who cannot guarantee quick and reliable delivery of their products will almost certainly be unable to compete; the internet can be accessed globally, so global reach is a big issue for firms involved in e-business, no matter how small; and the proliferation of dotcoms would have been impossible had the lack of an accessible transport network created a barrier to entry to this market. If new economy firms are



unusually reliant on express services, those involved in e-business are even more so.

4.9 The response to our survey of Italian companies bears this out. While only 26% of total respondents report that e-business has had an impact on the number of their express shipments, 93% of firms in the new economy sectors report an impact (Chart 4.1).

0 10 20 30 40 50 60 70 80 90

100

Total sample New economy companies0 10 20 30 40 50 60 70 80 90 100


The impact of e-business on express shipments

* employment-weighted % of respondents reporting that e-business has had at least a minor impact on their use of express services

Chart 4.1

Just-in-time inventory management 4.10 New economy firms tend to make high-value products, which typically have very high

depreciation rates. That means that keeping stocks to a minimum is even more important for these firms than it is for the economy in general, to avoid having large amounts of capital tied up in inventory and being left with obsolete stock. Express services have a key role to play in keeping inventories low, both in production and in sales. Some companies in the new economy sub-contract out all their transportation and distribution functions to the logistics arms of the major integrators.

4.11 95% of companies in the new economy sectors responding to our survey report that there are aspects of their production process for which next-day delivery of sub-components from their suppliers or elsewhere in their company is very important, double the proportion across the economy as a whole. Of these, 97% of new economy companies report that this is because they operate a JIT inventory system, compared with 35% across the whole economy (Table 4.1).



Case Study 8: Data Communications and Network Integration Group

We interviewed an international company that aims at being a one-stop service partner, solution provider and manufacturer for fixed and mobile networks.

The company has to be able to respond rapidly when there is a fault in its networks. For this, it relies on same-day express delivery of spare parts coordinated by one of the leading express companies, which also provides logistics and warehousing services. Next-day delivery services are then used to replenish stocks at the warehouse. The company considers this to be a cheaper and more efficient solution than operating its own warehousing and transportation operation given its current size and the logistics expertise on which it can draw, which helps to reduce its inventory costs.

Table 4.1: Importance of next day delivery of sub-components for firms in the new economy

Proportion of respondents stating that next-day delivery of sub-components is very

important

Of which, proportion stating that is because they operate

a just-in time inventory system

New economy 95 97

All-sector average 47 36

4.12 Similarly, on the sales side, virtually all respondents to our survey in the new economy sectors report that there are aspects of their companies’ delivery commitments to their clients for which next-day delivery services are important, compared with 54% across the whole economy. Of these, 98% of new economy firms report that this is because their customers operate a stream-lined production process, compared with 56% across the whole economy (Table 4.2). And 96% of new economy firms report that they would probably have to hold increased inventories of their products in order to meet customer demand if there were no next-

Chart 4.2

0

10

20

30

40

50

60

70

80

90

100

Total sample New economy companies0

10

20

30

40

50

60

70

80

90

100


Impact of no next-day express services on inventories

* employment-weighted % of respondents reporting that they should probably have to hold more inventory to meet customer demand if there were no next-day international express services



day international express services from Italy, compared with 18% for the whole economy (Chart 4.2).

4.13 Moreover, the evidence from the survey is borne out by our case studies. Of the firms interviewed, three could be described as ‘new economy’ firms. In all cases, low stocks were critical in their business, and express services were a key part of their stock management techniques: The telecommunications company (Case Study 1) considers express services to

be critical in meeting demand without holding large stocks.

The data communications company (Case Study 8) relies entirely on express delivery for spare parts, dispensing with any warehousing costs of its own.

Speed to market 4.14 Speed and reliability of delivery is essential to new economy firms for other reasons

besides JIT. The new economy is characterised by rapid, guaranteed delivery – more so than for the rest of the economy. If new economy firms were unable to promise this, many of them would be placed at an unsustainable competitive disadvantage relative to their international competitors.

4.15 That is reflected in the response to our survey. As Table 4.2 shows, next-day delivery to clients is even more important for new economy firms than for the average Italian company. And it is not just on the sales side that next-day delivery is important: all of the new economy firms we surveyed require suppliers to deliver packages to them by express delivery.

4.16 That is consistent with our case studies, too. The telecommunications company (Case Study 1), for example, states that its customers expect 24-hour delivery all year round, including Christmas.

Table 4.2: Importance of next-day delivery to clients for firms in the new economy

Proportion of respondents stating that next-day delivery services to customers is very

important

Of which, proportion stating that is because customers

demand next-day delivery as part of a streamlined production process

New economy 99 98

All-sector average 54 56

Global reach 4.17 Without access to a global transport network that can guarantee delivery at fixed

times, many – particularly smaller – new economy firms might not be in business at all. Small firms in niche markets have to compete with local providers of similar



products, and could not do so effectively if they were unable to guarantee delivery of their product to a certain timetable.

4.18 This is clearly illustrated by our case studies. The electronics manufacturing services (EMS) company (Case Study 5), for example, relies on express services to access its global supply chain when they are late in delivering components.

Barriers to entry 4.19 The existence of express services provides firms – especially smaller firms (SMEs) –

with the ability to move their product to market reliably and quickly without the need to build a transport network of their own. By doing so, express services remove an important barrier to entry for new firms – increasing the degree of competition in the market place, and thereby increasing macroeconomic efficiency. Essentially, a barrier to entry is the requirement for a substantial capital investment as a pre-requisite for competing in a given market. Without express services, the economies of scale available in transport networks would only be available to large, established firms, providing them with a competitive advantage.

4.20 This is particularly true for new economy firms. A firm cannot set up as a new supplier of electronic components for industry, for example, unless it is able to guarantee delivery of those components to a fixed deadline: if it cannot, its competitors will almost certainly be able to do so. As Chart 4.3 shows, new economy companies tend to use express delivery services to send products to customers more frequently than the average firm across the whole economy, suggesting that the absence of express services would constitute a more significant barrier to entry for new economy companies than for the average.

0

10

20

30

40

50

60

70

80

90

100

Total sample New economy companies0

10

20

30

40

50

60

70

80

90

100


Use of express services to send products to customers

* employment-weighted % of respondents reporting that they use express services at least occasionally to send products to customers

Chart 4.3



International best business practice 4.21 The globalisation that has accompanied the growth of new economy industries has

resulted in a much faster propagation of international best business practice around the world. Firms that were previously sheltered from global competition are now immersed in a global market, and rapid adoption of the most efficient technology and management techniques is critical to their success. Express services play an important role in allowing economies to take advantage of the benefits of international business best practice, such as global sourcing. To keep costs to a minimum, it is important to take maximum advantage of changes in local conditions around the world. For example, if a supplier in India is for some reason able to produce one of the inputs to a firm’s production process more cheaply than its usual supplier in, say, France, then the firm stands to gain a competitive advantage by sourcing from India rather than France. But it can only do so if the supplies can be transported quickly and reliably, just as they had previously been from France. Express services are often vital in facilitating this kind of global sourcing, which is particularly important for firms in the new economy.

4.22 Moreover, while the very recent past has seen the collapse of many e-business companies, in the medium- to long-term some macroeconomic benefit from business-to-business e-trade is to be expected. Part of this benefit comes from the role of e-business in global sourcing; price comparisons of supplies to industry can now be made using the internet, which might previously have been exorbitantly costly. The reduction in the cost of gathering information on comparative prices can have a dramatic impact on a firm’s total costs, and in aggregate upon the macroeconomy. Some estimates put the impact of e-business via this channel – facilitated by express services – at as much as 2% of GDP in the long run (ie after a period of ten years or so). Without express services, it is questionable whether these benefits would be achievable at all.

Conclusions 4.23 Our survey suggests that firms in the new economy are more-than-usually

dependent on express services, reflecting the kind of products that firms in this sector use express services to transport: High-value items, for which low stocks are essential (electronic components, etc).

Perishable items (such as tissue or blood samples for clinical trials).

Failed items, such as personal computers, for which rapid repair and return is essential.

Items purchased on-line, where rapid delivery to the customer is essential.

4.24 The implication is that if the Italian economy is successful in the new economy sectors – and we expect these to be among the fastest growing industries over the next 10-20 years – it will become increasingly reliant on the services of the express industry.



5 The Express Industry – A Leading Growth Sector

Introduction 5.1 In this Chapter, we consider the future prospects for the express industry and

compare its likely growth over the next decade with other industries in Italy. To do this, we draw on the responses to our survey of Italian firms that indicate how much they have increased their use of the express industry in the past and how much they expect their use to rise in the future, and on OEF’s Italian sectoral forecasts. We then calculate the likely direct contribution of the express industry to Italian GDP and government finances in 10 years’ time.

Key Findings: The growth of express services is expected to average 6.5% pa over the

next ten years, nearly three times as fast as GDP, providing there are no further constraints on its growth.

That out-performance mainly reflects the continued expansion of international trade and the increasing need for rapid, guaranteed delivery. There is little sign that new technologies, such as e-mail, will prevent the express industry from growing much faster than the economy generally.

As a result, employment in the express industry in Italy is expected to increase from just over 24,000 now to 38,700 by 2013, if it is allowed to grow unconstrained. Revenues to the Italian Treasury from the express industry are forecast to increase, from €334 million in 2002 to €665 million in 2013.

If express services were constrained to grow in line with GDP, then employment in the express industry would be 14,000 lower than these forecasts by 2013, and revenues to the Treasury from the express industry would be €240 million lower.

The drivers of growth in the express industry 5.2 Over the last decade the express industry has been one of the fastest growing

sectors of the Italian economy, with aggregate shipments rising by 12.1% a year between 1992 and 2002, over seven times faster than growth in Italian GDP. The strong growth of the express industry over the last decade reflects the increasing take-up of the industry’s services across the economy as a whole, reflecting a number of structural and macroeconomic factors: Globalisation & world trade: As Chapter 2 highlighted, world trade growth over

the past decade has been particularly rapid at 7.5% a year. OEF’s global forecast shows this trend continuing, with world trade increasing by over 90% over the next decade compared with a rise of almost 40% in world GDP.

Lean-inventory strategies & global sourcing: Express services enable companies to achieve significant cost and time savings by facilitating streamlined



production processes and rapid provision of spare parts, especially for companies with overseas subsidiaries or suppliers.

Quality of service: To remain competitive many businesses have to offer a premium service to their customers, frequently involving an immediate response to their changed requirements. The express industry facilitates this by offering guaranteed next-day delivery.

Competitive pricing: Adjusted for inflation, the cost of express delivery services has generally declined over the last 20 years, reflecting the increased efficiency of the express operators.

Internet and e-commerce developments: The use of the Internet has enabled rapid and efficient order processing and logistics planning.

Table 5.1: Has your use of the express industry increased?

Employment-weighted % of respondents reporting their views on how their use of express parcels/delivery services has changed over the last five years

Increased by over

10%

Increased by up to

10%

Remained about the

same

Decreased by less

than 10%

Decreased by over

10%

No response

Total sample 25 27 24 9 0 15

Manufacturers 39 45 15 0 1 0

Private services 15 11 3 22 0 49

Growth prospects for the express industry services over the next decade 5.3 Our survey asked Italian companies whether they had increased their use of express

delivery services over the last five years. Table 5.1 summarises the response. 25% of all respondents said their use of express services had risen by over 10% over the last five years, while another 27% reported an increase of up to 10%. Only 9% of firms said their use of express services had fallen, and in all these cases this was by less than 10%.



Table 5.2: Will your use of the express industry increase?

Employment-weighted % of respondents reporting their views on how their use of express parcels/delivery services will change over the next five years

Increase by over

10%

Increase by up to

10%

Remain about the

same

Decrease by less

than 10%

Decrease by over

10%

No response

Total sample 17 35 38 6 0 4

Manufacturers 26 39 35 0 0 0

Private services 12 2 52 22 0 12

5.4 Looking forward over the next five years, this requirement for rapid delivery is likely to intensify further among existing users of the express industry and spread to other sectors of the economy as, for example, more businesses use the Internet for purchasing and supply management, and the demand for logistics services increases. Our survey asked Italian companies whether they will be increasing their use of express delivery services over the next five years. 52% of all respondents replied yes, 38% said that their use of the express industry would remain the same, while only 6% indicated that they would be reducing their use (Table 5.2). Only 28% of firms believe that they will be able to use other distribution methods (for example, by transferring information, data or contracts by secure electronic means such as secure web-based products and broadband data transmission) that will reduce their use of express services in the future (see Table 5.3).

Table 5.3: Will alternative distribution methods reduce your use of express services? Employment-weighted % of respondents reporting their views on whether they anticipate

alternative distribution methods that could reduce the use of express services within organisations

Yes No

Total sample 28 72

Manufacturers 33 67

Private services 24 76

5.5 There are several factors that will support growth in the express industry over the next decade. First, in the short term the express industry may outperform overall Italian GDP as the considerable uncertainty surrounding the state of the global economy makes its services particularly valuable for customers who wish to minimise their inventories but at the same time be in a position to respond rapidly to any change in demand. Second, whereas many businesses may already be using



express delivery for transactions with the rest of the EU very intensively, this is less true for trade with the US and, particularly, Asia. It is widely expected that airfreight traffic between Europe and Asia will grow more rapidly than between other regions, as companies seek to capitalise on the rapid growth expected in the emerging economies. Third, companies and their customers are increasingly likely to demand rapid, guaranteed delivery.

5.6 But while there are many positive developments that should favour the express industry, there are also several factors that could stifle its growth: Increased regulation of air traffic. Express air operators already have to deal with

regulations concerning environmental issues such as aircraft noise and emissions, and there is pressure for this regulatory burden to increase.

There has been long-term underinvestment in the Italian road network. Moreover, the express industry also has to deal with regulatory issues, particularly relating to delivery within Europe – for example, from restrictions to the number of hours that drivers are allowed to drive without rest.

Increased security procedures across all modes of transport that might follow from the threat of further major terrorist attacks.

Estimating the growth of the express industry over the next decade 5.7 We expect the express industry to grow by an average of 6.5% a year in real terms

between 2003 and 2013. This estimate – which is also consistent with the expectations of the six leading express companies in AICAI - is in line with the growth we expect in the international trade (exports and imports) in the sectors that use express services most intensively. It is almost three times faster than our forecast of 2.2% a year real growth for the Italian economy as a whole over the next decade.

Table 5.4: Prospects for the express industry over the next decade

Per annum growth

1993-2003

Per annum growth

2003-2013

Estimate of combined output of sectors that provide the main customers of the express industry

0.3 1.7

Estimate of combined international trade of sectors that provide the main customers of the express industry

6.0 6.5

Estimate of express industry output 12.1 6.5

Italian real GDP 1.7 2.2



The direct impact of the express industry on the Italian economy over the next ten years 5.8 The above analysis clearly indicates that the express industry will continue to be a

high growth sector of the Italian economy over the next decade. Its value-added will approximately double by 2013 to about €1.27 billion in today’s prices. This rate of growth will result in overall GDP being about €460 million higher by 2013 than if the express industry grew merely in line with our GDP growth forecast of 2.2% per annum. (And note that this is only the direct impact of the express industry’s growth: it does not include the indirect or catalytic impacts of strong growth in the express industry on other sectors of the economy.)

5.9 There will also be benefits to total Italian employment from the express industry’s continued fast growth. Between 1995 and 2002 employment in the express industry is estimated to have increased from just over 14,000 to just over 24,000, broadly in line with output. Looking forward, we assume that productivity growth in the sector rises at the whole economy average rate of 2% per annum. On this basis, we expect employment in the express industry to reach over 38,500 by 2013.

5.10 The high growth of this sector will boost government revenues. We estimate that the employees and companies directly involved in the express industry contributed around €334 million to the Italian Treasury in 2002. By 2013 this might be expected to rise to over €665 million in today’s prices if the sector grew in line with our forecasts. However, if the sector were constrained to grow in step with overall GDP then the sector would provide revenues of €240 million less than that in 2013.

Table 5.5: The prospective size of the express industry

2002 2013

Value added (€mn) 634 1,267

Output growth 2002-2013 100%

2002 2013

Employment 24,065 38,693

Employment growth 2002-2013 61%

Conclusions 5.11 The express industry is a fast-growing sector in its own right, outpacing both GDP

and international trade growth as the industry serves the increasing need for rapid, guaranteed delivery. Despite technological developments, such as email and the internet, the express industry will remain one of Italy’s fastest growing industries, supported by innovation and increasing demand for logistics services.


The Impact of Express Carriers for the Italian economy and competitiveness

6 The Total Contribution of the Express Industry to the Italian economy

Introduction 6.1 In this Chapter, we assess the overall contribution of the express industry to the

Italian economy using an expanded version of Oxford Economic Forecasting’s Italian macroeconomic and sectoral models. We use the models to quantify the extent to which the Italian economy would have been held back over the last 20 years if the express industry had not developed, and how the economy would be constrained over the next 20 years if the express industry were prevented from expanding any further from its current size. Finally, we compare the economic benefits of a flight slot for an aircraft operated by the express industry with those associated with a variety of passenger aircraft.

Key Findings: If express services had not been available in Italy over the last 20 years,

productivity and competitiveness would have suffered such that GDP would now be €1.3 billion a year lower than it is. The overall cumulative cost to the economy over the last 20 years would be more than €10.3 billion.

Preventing any further growth in express services would have a cumulative cost in foregone GDP of nearly €19 billion over the next 20 years.

There are substantial competitiveness benefits to the Italian economy from the use of air services by companies, whether for business travel, airfreight or express deliveries. These benefits are estimated to be about three times as great for a flight by an express industry operator than for a typical passenger flight.

The OEF aviation – express – economy model 6.2 Given the variety of channels through which express services contribute to the

performance of the Italian economy, it is only possible to estimate the combined impact of the different forces at work in the context of a detailed model of the economy incorporating all the relevant effects. Such a model can be used to simulate alternative scenarios for express services and the implications for the rest of the economy.

6.3 We have modelled these effects by building an expanded version of Oxford Economic Forecasting’s Italian Macroeconomic and Sectoral Models. These models incorporate the effects of the growth of express industries on the productive capacity of the economy as a whole.

6.4 In the short term, a reduction in express services would have an impact on employment as well as on output, as firms relocated and their productivity was hit. But in the long run, the overall level of employment is not determined so much by the



level of demand from particular industries as by the supply of workers looking for a job. If an expanding industry increases the demand for labour sufficiently, this will, over time, put upward pressure on wages as firms compete for the available pool of workers, until the increase in wages is sufficient to choke off the extra demand for labour. Conversely, if the demand for labour is below the available supply, over time there will be downward pressure on real wages and interest rates until the falling cost of employing people is sufficient to attract additional demand for labour. So in the long run, it is investment and productivity which are the key to the economy’s output.

6.5 There are four routes through which express services enter into these relationships and affect other sectors in the economy: Intermediate demand generates indirect effects through the supply chain. Higher

output and employment in express services would automatically generate increased demand in sectors supplying express companies. This in turn would affect the level of employment in those industries, and the additional wages they pay would generate extra demand and jobs elsewhere in the economy.

Changes in supply affect express prices, which affect intermediate costs. Restrictions in the supply of express services would put up costs for businesses, whether through directly higher rates, longer times in transit as a result of lower frequency of service, or the need to find alternative ways to transport packages that would otherwise be delivered by express. This in turn would lead to a loss of competitiveness for those Italian industries which make significant use of express services, reflected in lower demand for Italian goods and services.

Express services facilitate productivity growth elsewhere. OEF’s detailed statistical analysis of the relationship between total factor productivity of 30 industrial subsectors and the output of transport service industries in Italy (of which express industries are a key component), is incorporated into the model through the level of output the economy produces for given inputs. To calibrate the impact of express services, we have calculated the contribution of transport services to total factor productivity, and then adjusted these estimates to reflect the proportion of value-added in the transport services industry that is represented by the express industry, and the sectoral express intensities of production drawn from our survey.

Productivity also affects returns to capital and hence the level of investment. As we have seen, the availability of next-day international express services is important to companies’ decisions about whether or not to locate in Italy. This is reflected in the model through the impact of changes in productivity back onto investment and hence the amount of capital equipment available for production.

The contribution of the growth of express services to the Italian economy today 6.6 20 years ago, international express delivery services in Italy were very limited. Had

they not grown in the way they have, but remained limited over the last 20 years, Italian productivity performance and competitiveness would have been poorer. In this section, we quantify that cost to the Italian economy.


6.7 According to our model, if express services had not been available in Italy over the last 20 years, Italian GDP would now be €1.3 billion per year lower than it is. Total


employment would probably not be different, since those people employed in the express industry would have found other work. But average productivity per head across the whole economy would be lower. The overall cumulative cost to the Italian economy over the last 20 years would have been €10.3 billion in 2002 prices.

6.8 There are two main reasons why the lack of express services over the last 20 years would have been costly for GDP in Italy as a whole: Some firms – particularly in sectors that rely heavily on express services - would

not have located in Italy. The evidence from our survey suggests that about 10% of firms would probably relocate some operations abroad were international next-day express services not available. In our calculations, we have made the cautious assumption that, of those who stated they would be forced to relocate, only 5% would in the event actually have done so. The loss of these firms to Italy would have meant the workers currently employed there would be employed elsewhere, but less productively, resulting in lower average productivity across Italy as a whole.

The absence of express services would have meant that Italy lost out on the beneficial ‘catalytic’ effects, which have improved productivity in other sectors across Italy (eg increased use of just-in-time inventory systems). The loss of these catalytic effects contributes around half of the total loss in GDP.

6.9 So, although the express industry itself directly accounts for €634 million of total Italian GDP, without express services Italy as a whole would have been more than twice as badly hit than that figure suggests over the last 20 years. This clearly demonstrates that, like the aviation industry generally, the express industry ‘punches above its weight’ in the sense of facilitating extra growth in other sectors.

6.10 Moreover, our estimate of the cost to the Italian economy is, if anything, likely to be an underestimate. If we were to assume that, rather than just 5%, 10% of firms saying that they might possibly relocate if there were no international next-day express services would actually have done so, the GDP cost would have been €2 billion a year, with a cumulative cost of €17 billion over the last 20 years.

Table 6.1: Impact on Italian GDP of no growth in express services over the last 20 years

Impact on GDP in 2002 Cumulative impact on GDP over last 20 years

Impact assuming 5% of firms who report they might have relocated would in fact have done so

€1.3 billion

€10.3 billion

Impact assuming 10% of firms who report they might have relocated would in fact have done so

€2.0 billion

€17.3 billion



The impact of express services on the Italian economy over the next 20 years 6.11 Going forward, express services are likely to make a similar contribution to Italian

economic performance as they have over the last 20 years. That is because the sectors that are most reliant on express services are among the most productive and the fastest growing sectors in the Italian economy: their share of Italian employment and output has increased over the last 20 years and is set to increase further over the next 20. So anything that makes them less competitive, or forces them to relocate overseas, would now be more costly to the Italian economy than ever.

6.12 According to our model, if express services were not available in Italy over the next 20 years, by the end of that period, GDP would be €2.1 billion a year lower in 2002 prices than it would be if express services were allowed to grow without constraint. The cumulative loss of GDP from no growth in the express industry over the next 20 years would amount to €19 billion in 2002 prices. That loss would continue to accumulate further into the future.

6.13 Once again, this impact would be distributed unevenly across the sectors. ‘New economy’ sectors, such as computers & office equipment and electrical engineering, as well as key Italian export industries such as textiles and footwear, have among the highest express-intensities of production. Those who lost their jobs in express services or in industries highly reliant on those services would eventually be employed elsewhere. But they would probably be less productive than otherwise and their standard of living would be lower. And average productivity in all industries would fall if express services were withdrawn.

The economic benefits of flight slots for express operators compared to passenger aircraft 6.14 The analysis in the previous sections has described the impact over the last 20 years

had express services not developed, and over the next 20 were express services constrained to no further growth. In both of these cases, the loss of express services results both in firms relocating from Italy and catalytic impacts on productivity and competitiveness in other sectors. However, even marginal changes in the provision of express services will have an impact on Italian GDP, via their catalytic effects and the direct impact on value-added from the express industry itself – even if such marginal changes do not push firms into deciding to relocate abroad. One way to think about such marginal changes is to explore the effect of increasing the number of express operator aircraft movement slots by one.

6.15 Our model allows us to quantify the impact of substituting an express operator flight slot for a passenger flight slot. The results of this comparison, however, depend very much on the nature of the passenger flight we consider: OEF’s research on the economic contribution of transport services to the sectoral

performance of the Italian economy suggests that there are substantial competitiveness benefits to the Italian economy from the use of air services by companies, whether for business travel, airfreight or express deliveries.

We estimate that the wider economic benefit from a passenger flight entirely consisting of business passengers would be around €29,000.



On average, around 35% of the passengers on a passenger flight are business travellers, with the remainder travelling for leisure. Our model suggests that there are no wider productivity and competitiveness benefits to the economy from leisure travel. The wider economic benefit of a typical passenger flight is therefore estimated to be €10,150, while a typical charter flight does not generate wider economic benefits.

The proportion of business travellers on flights from the main airports used by the express industry may be lower than the Italian average.

6.16 Our model suggests that the wider economic benefit for a flight by an express delivery operator is around €29,000. This is almost three times greater than for the typical Italian passenger flight. And the difference is likely to be even more pronounced with respect to a typical non-express flight from an airport frequently used by the express industry.

6.17 The wider economic benefit from an express operator flight is much greater than for typical passenger flights because all of an express aircraft is dedicated to serving business use. Passenger flights make a substantial contribution to Italian productivity and competitiveness by facilitating business travel. But they are rarely dedicated solely to business travel.

Chart 6.1

0

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Italian average -

business/leisure mix

Charter flight

One express operatorslot

0

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15000

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25000

30000

Wider economic benefits of passenger slots and integrator slots

€ €

Wider economic benefit via productivity, investment and competitiveness

0

One passenger slot

Conclusions 6.18 Like the aviation industry in general, the express industry ‘punches above its weight’.

It directly accounts for €634 million of Italian GDP, but through its impact on competitiveness, investment and productivity supports €1.3 billion of total output a year at present. Over the next 20 years, that contribution is set to increase to €2.1 billion a year in 2002 prices. Constraints on the growth of express services in Italy would therefore be more costly than just the loss in output from that industry. By forcing some firms to relocate and others to become less competitive, output overall



would be lower in the long run than it has the potential to be. Moreover, the short-run impact of such constraints would be even more pronounced: as firms close down their Italian operations, unemployment would increase, and a significant proportion of the capital stock – especially in the most affected sectors – would pass out of use.



7 The Economic Impact of Restrictions on Night Flights

Introduction 7.1 In this Chapter we examine the necessity for the express industry to continue to

operate at night1 in order to deliver the significant economic benefits to the Italian economy detailed in the previous Chapters. We also provide an estimate of the impact and costs incurred in stopping nighttime express flights at Italian airports.

Key Findings: The express industry is dependent upon flying at night from a limited number

of airports to deliver the significant economic benefits described in previous Chapters of the report.

Many Italian businesses believe that they would be badly affected by the cessation of next-day deliveries guaranteed by the operation of night flights. About 10% of firms would probably relocate some operations if next-day deliveries were not guaranteed.

It is essential that the economic contribution, views and policy priorities of the Italian express industry are considered and recognised in decisions on aviation policy.

The necessity of night flights for the express industry 7.2 Express services are used primarily by Italian business to achieve the next-day

delivery of goods and documents to customers throughout Europe and North America2. As we have previously reported, products are time-sensitive because they move according to thin and high velocity supply chains, enabling reduced obsolescence costs and inventory costs. This usually requires goods to be picked up at the end of the working day, for delivery early the following day. This reduction of ‘daylight’ in-transit time is how companies perceive delivery lead times in order to provide competitive advantage.

7.3 The only way to achieve such a delivery schedule is by the operation of aircraft outside of normal business hours, including those defined as night, between 11pm and 6am. Night flights are only used when no other alternatives are available. They are particularly important for the provision of next-day delivery services to/from Southern Italy.

7.4 Around 70% of all aircraft movements operated by the express industry during 2002 occurred at night.


7.5 In the worst-case scenario, if night flights were banned at Italian airports, many of the next-day consignments currently carried on those services would not in future travel,

1 Night is defined as being between 11pm and 6am. 2 Goods to areas other than Europe and North America can take between 2 and 3 days to deliver by express services.


and the resultant trade would be lost to the Italian economy. This is because the express industry would not be able to maintain the connectivity that is required with other major air express operating hubs in Europe, such as Brussels, within the much-reduced time-window available. In order to process everything for multiple express flights departing before 12am or arriving after 5am would require much larger facilities and manpower.

7.6 Not only is it imperative that shippers have access to the speed and efficiency of next-day deliveries, but there are also other operational advantages to be gained from air operations at night.

7.7 It would be difficult to operate express flights during the day because of increased congestion both in terms of surface access to airports and the availability of runway slots at the airports themselves. Express flights would have to compete with passenger aircraft for scarce resources.

7.8 Night flights also enable: Optimal use of both road and air infrastructure (ie on a 24 hour basis)

Spreading of airport, airspace and Air Traffic Control utilization, keeping those capacities open for higher volume passenger traffic during daylight hours.

Better utilisation of existing airport resources since night flights have comparatively little add-on cost to their normal operations.

Impact of no international next-day express delivery 7.9 Chart 7.1 shows the impact that a cessation of next-day international express

deliveries would have on Italian business. 41% of respondents report that their business would be very badly affected, while 26% say that they would be inconvenienced.

7.10 Manufacturing firms would generally be more badly affected than those in the private services sector, with nearly two-thirds of all manufacturing firms reporting that they would be very badly affected.

7.11 Table 7.2 summarises the impact that the ending of next-day international delivery would have on organisations. It shows: 16% of firms would possibly have to relocate from Italy to overseas, and 14% of

firms report they probably would have to do so.

Within manufacturing, 32% of firms would possibly have to relocate, and 26% probably would do so.

33% of firms report that they would probably lose orders because of longer delivery times.

Again, manufacturers would be particularly badly hit, with 54% probably losing orders.

31% of firms might have to hold more inventories of products to meet customer demand, while 15% might have to hold more stock to meet the requirements of their production process.



Chart 7.1:

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All Manufacturers Private services0

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Inconvenienced

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Effect of loss of international express services


Table 7.2: Effect on organisations if there were no international next-day delivery

Probably Possibly Never No Response

All sectors 14 16 68 1

Manufacturing 26 32 40 2

Operations would have to relocate from Italy to another country

Private Services 3 1 96 0



Orders would be lost because of longer delivery times

Private Services 16 0 83 0



Increased inventories would have to be held at Italian site to meet production requirements Private Services 12 1 87 0



Increased inventories of products would have to be held to meet customer demand Private Services 2 7 91 0

7.12 The sectors reporting that they would most likely have to relocate if there were no next-day delivery include textiles and footwear, computers & office equipment,



electrical engineering and chemicals. These sectors also report a significant likely loss of orders, as do the motor vehicles and other transport equipment sectors.

The economic cost of restricting night-time express flights 7.13 OEF’s macroeconomic and sectoral models show that the catalytic effects on other

parts of the economy – from lost competitiveness and the likelihood of some companies relocating out of Italy – would lead to a loss of GDP of €780 million a year. Over a 20 year period, we estimate that the cumulative cost would build up to over €30 billion.

7.14 In addition, severe restrictions on night-flights would be likely to undermine the development of the express industry in Italy, since it would then compete with traditional freight-forwarders. In particular, Italy would lose out on the opportunity to become the main hub for express operations in Southern Europe, North Africa and the Middle East.

Conclusions

7.15 The express industry is dependent on flying at night to deliver the significant economic benefits described in this Report. Restricting night-flights from Italy would undermine the industry at significant cost to Italy’s economy and competitiveness.



Annex: Survey of Italian Companies

Table A: The composition of firms responding to survey asking Italian companies about the importance of express delivery services to their businesses

By sector Number of

firms responding

% of sample

By number of employees

Number of firms

responding

% of sample

Textiles, clothing & leather goods

15 10 < 50 87 58

Food, beverages & tobacco

3 2 51-250 27 18

Chemicals & plastics

2 1 251-1,000 18 12

Electrical equipment

4 3 1,001-10,000 14 10

Paper & glass 3 2 10,001-25,000

2 1

Non-metallic minerals

3 2 > 25,001 2 1

Wood and wooden products

4 3 Total 150 100

Metals 9 6

Engineering 13 9

Other manufacturing

2 1

Construction 5 3

Energy 3 2

Financial services 10 6

Business services 18 12

Real estate 5 3

Transport & communications

16 12

Retail trade 10 7

Hotels 8 5

Government/official services

14 9

Other 3 2

Total 150 100


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