NEW YORK (CNNfn) - Air cargo carrier Emery Worldwide grounded its fleet of 37 freighters Monday as the Federal Aviation Administration prepared to pull its operating certificate because of maintenance problems.
An official of the FAA said the agency pushed for the grounding because its investigation discovered more than 100 violations of safety regulations.
Air cargo carrier Emery Worldwide agreed Monday to ground its fleet of freighters instead of having the FAA pull its operating certificate due to more than 100 alleged safety regulation violations.
"This gives us a lack of confidence in the carrier's ability or willingness to fly safe aircraft," said Ava Mims, the deputy director of the FAA's flight standards office.
Mims said the current agreement with Emery will keep its planes on the ground for at least 30 days, but that it likely will take much longer to resume operations.
A spokeswoman for Emery, a unit of CNF Inc., said the move by the FAA came "out of the blue." Shares of CNF (CNF: down $1.19 to $30.31, Research, Estimates) were off about 4 percent in trading Monday.
"We were called Friday and told to come to a meeting Saturday," Emery spokeswoman Nancy Colvert said. "We think it's unnecessary and unwarranted. We've been working with the FAA on an almost daily basis for the last 18 months. All the issues they raised are things we've already remedied or were in the process of remedying. We reached an interim agreement with them and said we will cease our operations until the issues are resolved."
Mims said the FAA has been investigating safety problems at Emery since January, 2000, when it uncovered problems as part of a normal safety audit. The following month three crew members were killed in the crash of a DC-8 in Rancho Cordova, Calif., just outside Sacramento, shortly after takeoff as the pilot attempted to return to the airport due to what he reported was an extreme center-of-gravity problem, initially suggesting that the plane was improperly loaded.
But the National Transportation Safety Board, in setting a hearing on the crash for later this month, said the major issue now being examined centers on contract maintenance and the associated oversight by Emery and by the FAA. That hearing was indefinitely postponed Monday due to the action by the FAA against Emery.
Mims said Emery responded to concerns about improper loading of aircraft in the wake of that crash, suggesting to the FAA it was prepared to correct other problems. But she said it has not followed up on other problems found by inspectors or its own pilots. She cited examples of Emery pilots writing-up equipment problems on the same aircraft time after time without the problems being corrected.
Emery said it had leased the necessary aircraft from other cargo carriers to operate a full schedule of flights Monday and for the immediate future, although Colvert could not estimate the cost to the carrier. The only air cargo carrier named by the company as providing planes is privately held Ryan Aviation of Wichita, Kan.
This is a relatively good time for Emery to be searching for aircraft, said Ron Ryan, chairman and owner of Ryan Aviation. He said air cargo has been so slow there are plenty of excess cargo planes available for Emery.
"I think Emery is in excellent shape," he said. "They can get all the lift they need and then some." Ryan said the seasonal pre-holiday pickup in air cargo likely won't be seen until late September.
"If this was December and something like this happened, it would be a disaster for their customers. But their customers won't even notice it happening now," Ryan said.
Ryan said Emery also stands to have 22 Boeing 727 freighters become available at the end of this month unless it wins an appeal of a lawsuit, which thus far has unsuccessfully tried to block the U.S. Postal Service from shifting some of its priority mail business from Emery to FedEx Corp. (FDX: up $0.18 to $40.15, Research, Estimates). Ryan is leasing those 22 planes from Emery and flying them under contract for Emery, and they are not affected by Monday's grounding.
Emery said that as a result of the grounding of its own planes, 800 pilots, crew members, and other administrative personnel will be laid off, although details of those layoffs were not immediately available. Emery had about 1,100 employees before those layoffs.
About 500 of those being furloughed are pilots and crew members. Capt. Tom Rachfort, a pilot with Emery, said that the pilots have been complaining for some time about the maintenance performance of Emery and CNF, trying to raise alarms with the FAA and the media.
"I don't think it was a surprise," he said of the shutdown of the airline operations. "We were hoping we'd be able to get it rectified with the airline prior to it being shut down. We've got no money for parts. Without proper financing, there's no way to correct problems."
Alex Brand, analyst with BB&T Capital Markets, said that he believes this will be the final push to have Emery move away from owning planes altogether, and to be what is known in the field of freight transportation as a non-asset based carrier, or a third party, one that arranges to move freight on other companies' planes, trucks or ships.
"They've stressed on conference call after conference call the desire to be asset light," Brand said. "They feel like they need a network of planes to fuel the kind of freight they carry. But now they're going to be running a third-party network anyway. I can't see them going out of their way to put the planes back in the air."
Emery's main business is transporting heavy-weight air cargo, rather than the letters and packages handled by carriers such as FedEx, United Parcel Service Inc. (UPS: down $0.11 to $55.97, Research, Estimates) and Airborne Express, a unit of Airborne Inc. (ABF: up $0.13 to $13.52, Research, Estimates).
Bear Stearns transportation analyst Ed Wolfe said some of Emery's competitors that stand to benefit from its problems include freight forwarder EGL Inc. (EAGL: down $0.11 to $12.59, Research, Estimates) and BAX Global Inc., a unit of Pittston Co. (PZB: up $0.01 to $21.63, Research, Estimates) and, to a lesser extent, USFreightways Corp. (USFC: up $0.24 to $34.10, Research, Estimates), which has a freight forwarding unit that competes for the same customers.
Brand said the heavy-weight air cargo business has been a money-losing sector even in good times, and that it apparently is unable to support both Emery and BAX Global.
"It's a foregone conclusion there's one carrier too many," Brand said. "But even with this, I don't think it's definite that Emery will be the one that disappears."
CNF's other businesses, Con-Way Transportation Services, a leading nonunion trucking company, and Menlo Logistics, a third-party logistics provider, are both among leaders in their field, but they are being drawn down by Emery's problems. Emery lost $25.2 million even before special charges in the second quarter, as revenue fell 16 percent to $530 million.
Even before this latest problem Emery was cutting the size of its fleet from 54 aircraft a year ago. Including special charges for write-down of those and other assets and a restructuring charge, Emery had an operating loss of $370 million in the second quarter, plunging CNF to a net loss of $227.9 million with the charges, rather than the earnings of $43.7 million it posted excluding the charges.
Since the Feb. 16, 2000, fatal crash in Rancho Cordova, Emery has had three other incidents investigated by the National Transportation Safety Board. Mims cited one from April of this year in which maintenance workers installed the wrong kind of equipment in one landing gear, leaving the crew unable to lower its landing gear and forcing it to land the DC-8 in Nashville, Tenn., on two landing gears and a wing. No one was hurt in that crash, though.
"That's a perfect example of the cavalier attitude of Emery," said Emery pilot Rachfort. "The airline had not been giving them the money to buy the parts. They took a part off one airplane and tried to make it work on another airplane. They said they check this thing. Obviously they didn't. This is the stuff the feds are upset about."
In another incident, an Emery crew was able to land a plane in Denver in April 2000 after the failure of the clamp that secured the high-pressure air duct caused an engine failure, a hole in the fuselage and the loss of cabin pressure.
The FAA proposed fining Emery $500,000 on Feb. 28, 2001, charging that it failed to notify pilots on 19 occasions that hazardous materials were being transported on their aircraft.
It also announced proposed fines totaling $198,000, charging Emery operated one DC-8 without proper maintenance and another aircraft was operated despite not being in compliance with an airworthiness directive. Cory said that those are just two of "many" proposed fines pending against Emery.
Emery's Colvert said that those complaints are still only pending and that in only one case has a proposed fine against the carrier reached the point of being settled and paid.