Time Engineers

Visitors to Beijing for the 2010 Airport Cities conference no doubt will be impressed by Beijing Capital International Airport‘s US$3-billion main terminal, opened in time for the 2008 Olympic Games. They’ll gawk at the 36.6-million-sq.-ft. (3.4-million-sq.-m.) Airport City Logistic Park, developed with a first-phase investment equivalent to $585 million, and aiming to boost the nation’s pharmaceutical industry, among others.

They’ll see the Bohai Economic Zone, and its place within the larger Beijing-Tianjin-Hebei Economic Circle. And they’ll start to get a sense of just how many airport cities might sprout in China alone. The nation plans to build some 100 new airports by 2020, in addition to its major hubs in Beijing and Shanghai, in order to serve growing international traffic as well as a domestic air transport market that in the first half of 2009 had grown by more than 20 percent over the previous year’s passenger levels, ranking China No. 1 in the world.

The delegation from Memphis, Tenn., which hosts the 2011 conference, will sense a connection, and not just in the sense of having their own airport city plans. It’s a new flight connection between Shanghai and FedEx Corp.‘s Memphis hub, courtesy of their new 777 freighter aircraft introduced in January.

“Because of the reach of the 777, where it can get into the U.S. mainland out of Asia without a stop in Anchorage, hit the same delivery time and have four to six hours in the middle you don’t have to spend refueling and so on, the customer at the front end has an extra two to four hours,” explains Tom Schmitt, president and CEO of FedEx Global Supply Chain Services.

Or, as FedEx Chief Information Officer Rob Carter once told Fortune, “We engineer time … I believe that as the world shrinks and changes, we offer solutions that allow you to engineer time to make things happen along time schedules that weren’t possible.”

“Think about retail and e-tail business,” says Schmitt during a group interview with Memphis-Shelby County Airport Authority Chairman Arnold Perl and Memphis Regional Chamber President and CEO John Moore. “You have a few more hours of orders you can accommodate that same day.A lot of co-location here in Memphis happens for that reason. Now the same is true for an entire part of Southeast Asia.”

Location, Relations, Negotiation

Growth in Asia is one reason FedEx plans to have 15 new 777s flying the route by 2014, with plans for 15 more by 2019 and options on yet another 15. “We’re still aggressively investing in our business,” said Stephen Liberto, managing director of regional sort operations for FedEx, during the Institute for Trade & Transportation Studies’ freight mobility conference in Memphis in January. “We do not see transportation as a long-term investment as a bad thing.”

Neither does Memphis.

In their 2007 book “Simple Solutions,” Schmitt and Perl recount how the airport authority saw the light when FedEx needed more space for hangars, ramps and sorting facilities, but was landlocked because of the Tennessee Air National Guard’s facility for C-17 cargo jets on an adjacent 103-acre (41.7-hectare) parcel.

“It looked like a stalemate that would force FedEx to look for expansion at airports in other cities,” they write.

But serendipity came into play, as the U.S. Air Force changed the mission of the Tennessee Air National Guard such that much larger C-5 jets would need to use the facility, which would require some $125 million in upgrades. However, the existing base did not have enough space to accommodate those C-5s while also providing the necessary protection required by all military bases since Sept. 11, 2001.

The Airport Authority stepped in and offered a solution: Use the $125 million in Air Guard funds to build a new base on a greenfield site on the opposite side of the airport that would be out of the way of FedEx. Once that was complete, the Air Guard would return the old base to the Airport Authority, which would then lease it to FedEx Express for its capacity expansion.

But the $125 million, while enough to modify the old base, was about $100 million short of what was needed for a new base. So a simple solution was devised: FedEx Express would pay the difference, which would be used as a prepayment of rent for the old base for a period of 30 to 50 years. Negotiations took months, with the Airport Authority agreeing to be the contracting agent and manager for the $220-million project.

The situation was a reprise of sorts of FedEx’s original choice of Memphis over Little Rock, Ark., for its startup hub, when the company was able to use some hangar space belonging to the Air National Guard.

For both Memphis and FedEx, that military connection continues to this day. For the city, it’s via the redevelopment of 4.25 million sq. ft. (394,825 sq. m.) of warehouse space at Memphis Defense Depot into Memphis Depot Business Park, where such companies as Cargill are major space occupiers. For FedEx, it comes via LOGTECH, a supply chain education program for top officers the four U.S. military branches that Schmitt champions, and which now graduates 1,000 officers a year.

Schmitt also serves as chairman of the board of the Memphis Regional Chamber, as well as chairman of the city’s Aerotropolis initiative, launched two years ago after reading Dr. John Kasarda’s favorable comments about Memphis‘s potential in the arena. Kasarda has promulgated the aerotropolis concept over the past several years, carrying on an airport city concept pioneered by Site Selection publisher and founder McKinley Conway. And Schmitt knew Kasarda from years before, through their work with LOGTECH.

The Power of Numbers

The aerotropolis initiative is built on the area’s “quadramodal” capabilities, says Perl, a longtime civic leader and labor lawyer who’s a partner at Ford & Harrison, LLP. That means air, rail, road and water. The Port of Memphis is the fourth largest inland port in the nation. It handled 19.1 million tons in 2006, and had an economic impact of $5.5 billion. More than 300 truck lines operate out of Memphis. Intermodal centers from Union Pacific, CN and BNSF have received nearly $1 billion in investment, with a new one from Norfolk Southern on the horizon, as some 220 Class I freight trains puff through town daily. The airport itself has invested $1 billion over the past 15 years.

In fact, “15” keeps popping up in Memphis, which leads large U.S. metros with 15.9 percent of its work force engaged in logistics. The new 777 takes 15 hours to fly its China-Memphis route. Fifteen minutes defines the drive-time radius of the immediate aerotropolis, though its effects can extend 60 miles (97 km.) or more away from the airport. And it cost $15 million to build a new federal inspection services facility in conjunction with the airport’s first international flight service, which will celebrate its 15th anniversary on June 27, 2010.

However, it was 16 distribution and logistics companies that either relocated or expanded in Shelby County during 2008/2009, investing more than $261.6 million and creating 1,616 jobs. In addition to traditional distribution business from such companies as GlaxoSmithKline and Smith & Nephew, even more time-critical logistics facilities are a major force. Witness operations from the National Eye Bank Center and Advanced Toxicology, the largest overnight drug-testing lab in the U.S.

Schmitt calls the aerotropolis an accelerator for FedEx’s own critical inventory logistics business, “helping to provide the best modes for either central or forward-stocking location distribution.” That division currently has more than 200 U.S. locations and 40 customers, and is growing.

“The label of aerotropolis is a mandate,” says Schmitt, praising the area’s collaborative spirit. “We figure these things out together. That’s the beauty of being in a place where what you do matters, that’s small enough that connection happens.”

After all, he says, FedEx founder Fred Smith didn’t pick the city by accident. It was positioned ideally in terms of both U.S. population and GDP, and was relatively weatherproof compared to other locations. Now that the FedEx hub has grown to its global stature, other businesses involved with the cargo side of the airport city can take advantage of low costs because FedEx has half the costs covered already.

Schmitt’s leadership of the Chamber’s efforts is likened to running a FORTUNE 500 company by Chamber staff. He sees the aerotropolis initiative as “the pacesetter for all the other pieces of our economic development plan. It sets the standard for how high is up” when it comes to economic impact, and pulling along the Chamber’s other initiatives in such areas as innovation, bioscience and music tourism.

“He’s meeting with senior staff once a month. We have color-coded goals. He gets monthly status of our initiatives,” says Jim Covington, vice president of logistics and aerotropolis development for the Chamber.

“There are FedEx employees we’re able to call on if we have questions,” says Amy Daniels, the chamber’s director of communications.

“It’s an amazing advantage to have, like going to the encyclopedia,” says Covington.

“We’re sitting on a gold mine, and we’d better take advantage of it,” says Schmitt.

First Flight

Striking that gold could be traced back to one flight: That Northwest/KLM flight that decided to be the first international passenger route to Memphis in June 1995.

John Moore says he asked Mike Levine, Northwest Airlines’ president at the time, what it would take to get an overseas nonstop flight to land in Memphis, and was told that if he lined up commitments on a demanding punch list, Northwest would support the idea. Those requirements included building a new federal inspection services facility (with funding raised from outside the airport’s residual lease agreement with its carriers); getting cargo and passenger commitments from companies and shippers; and getting written commitments from approximately a dozen top U.S. markets that would feed in to Amsterdam (home of the model airport city of Schiphol) as a destination.

Moore and his team managed to check off that punch list in a mere six months. Levine was astounded, says Moore. What’s more, market research showed that making the flight four times a week would be revenue-positive.

“What made it show that was a peculiar combination of double-connect, single-connect and local traffic,” says Moore, citing an example of double-connect as going from Mobile to Memphis to Amsterdam to Manchester, England. “About 67 percent in the economic model showed it would carry double-connect traffic. It was so successful we went to five daily, and then daily by the end of the year.”

Perl says the FIS facility became a model for how such a facility should function. And because of its linear design and the fact that the flight was the only one at first, “it was like private concierge service getting through customs,” says Moore. “So we had shorter connect times. We had some markets where our double-connects were faster than single-connects in other places.”

Moore points to a recent spinal division headquarters retention and expansion by medical device maker Smith & Nephew as Exhibit A for the power of the aerotropolis, as the company picked Memphis over Raleigh, N.C. Another recent manufacturing plant location decision in Tunica County by German pipe manufacturer Wm. Schulz also cited the airport’s daily flight to Schiphol as a factor.

Central to the flight’s inception, says Perl, was Northwest’s groundbreaking alliance with KLM, protected by anti-trust immunity. And that in turn hinged on high-level government negotiations.

“Northwest invented the alliance technology,” says Moore. “The open skies agreement approved by the Dept. of Justice hinged upon the open skies agreement being negotiated between the U.S. Dept. of Transportation and their counterparts in the Netherlands. That was the first open skies agreement.” And it served as a model for similar discussions between Japan and the U.S.

Moore says every open skies agreement on the planet has led to more passenger traffic, more revenues and a flourishing business sector.

“That’s why the aerotropolis concept is so important,” he says. “For airport cities, those early on like us that have easy access to other parts of the world are going to be the assets that drive growth in our economies.”

Perl says the parallels between Memphis and Amsterdam are considerable: “Both are economic juggernauts located in mid-sized cities,” not major capitals, he says. And Amsterdam, like Memphis, “had this quadramodal infrastructure that had grown up separately, without a systematic plan to connect the modes.”

But just as important as the system implementation, if not crucial to it, is the enthusiasm with which it is embraced.

Fifteen years ago, when that inaugural flight from Amsterdam, nicknamed “Elvis One,” touched down in Tennessee, international media were on hand to see 2,000 invited guests filling the airport, a dozen fire trucks celebrating with a traditional runway spray, and the cockpit crew waving U.S. and Netherlands flags out their windows as they taxied.

“When that plane came in,” says Perl, “we imagined our future.”