Dim and Dimmer
The parcel/express business, already slumping before Sept. 11, took a big hit following the terrorist attacks. But some foresee a brighter future.
By Jim Thomas, Contributing Editor -- Logistics Management, 1/1/2002
As 2001's third quarter drew to a close, the parcel/express industry's prospects had dimmed; business could charitably be described as slumping and revenues had slipped significantly from year-ago levels.
Then came Sept. 11. The terrorist attacks on that day knocked the legs out from under the industry. The U.S. Postal Service estimates that since that date, it has sustained $3 billion in unbudgeted costs directly attributable to the attacks. And for the first time in memory, the short-term survival of asset-heavy parcel/express carriers has become an issue, says Theodore R. Scherck, president of the Colography Group, a market intelligence firm specializing in transportation. "They took a giant hit on Sept. 11."
But there have been some positive signs as well. United Parcel Service (UPS) reported third-quarter 2001 gains in revenues and international volumes. And many analysts said that although the attacks had serious short-term implications for parcel/express carriers and their customers, the fundamentals were in place for economic recovery, perhaps as early as the second quarter of 2002.
Mid-Year Woes
Analysts note that cracks in the parcel/express industry's performance began appearing well before Sept. 11, particularly in the United States. "Economists can argue whether it was a slowdown or a recession, but that's splitting hairs," says Scherck. "The economy was severely [weaker] at the midpoint of last year than it was at the midpoint of 2000."
By June 2001, capacity for expedited transportation had exceeded demand. According to the Colography Group's quarterly analysis of traffic and yield trends, domestic shipments of expedited air cargo totaled 711.5 million through the second quarter of last year, down 3.2 percent from the second quarter of 2000. Revenues fell 3.3 percent over the same period, and tonnage dropped 11.4 percent. This marked the third consecutive quarter of declines in year-over-year total shipment volume.
The slowdown was sharpest in the overnight and deferred freight category, which experienced tonnage declines of 18.7 percent in the second quarter.
But other segments were affected too: U.S. ground parcel shipments totaled 864.6 million in the second quarter of 2001, a 0.4-percent drop from secondquarter 2000 levels. Ground parcel revenue increased 3.0 percent, while tonnage slipped 2.5 percent.
Conditions Worsen
Aside from snarling deliveries in the days immediately following Sept. 11, the terrorist attacks exacerbated already deteriorating conditions within the economy. Analysts had thought declines in manufacturing would bottom out by August or September, but the attacks delayed the expected recovery.
Experts recently polled by the National Association of Business Economists (NABE) estimate that the Sept. 11 incident caused real gross domestic product (GDP) to drop by 1.0 percent in the third quarter of 2001 and 1.3 percent in the fourth quarter. NABE forecasts a GDP decline of 1.6 percent during the first quarter of 2002 due to the attacks.
The attacks also raised serious economic and political issues for parcel/express carriers. "As far as aircraft use, the policy makers are in a dither about what should be done to protect us without crippling our ability to implement supply chain strategies," says Scherck. "The government will be deciding what needs to be done. This could take until spring or it could take all year."
The U.S. Postal Service was hit hardest by the attacks, including the Sept. 11 airplane hijackings and subsequent acts of bioterrorism. In testimony before the Senate, Postmaster General John E. Potter requested a one-time appropriation of up to $2 billion. "The most significant of these expenses are the purchase of new equipment to sanitize mail and the modification of our systems and processes necessary to accommodate the new security measures," he said. The attacks could cost the Postal Service as much as $2 billionduring the 2002 fiscal year, says Potter, who adds that this would come "on top of the loss of $1.35 billion that was projected" before the terrorist attacks.
Airlines are also suffering. After systemwide shutdowns in the days immediately following Sept. 11, the airlines grounded about 20 percent of their flights. Year-to-date totals through October 2001 show that United Airlines' cargo ton-miles on scheduled flights dropped 23.2 percent to 1.64 billion ton-miles, and mail dropped by 18.3 percent to 4.04 million ton-miles. During the same period, American Airlines reported that its cargo ton-miles were down 7.0 percent, from 1.90 billion to 1.76 billion.
The federal government has provided some measure of relief for the airline industry. First, the U.S. Treasury Department allowed air carriers to defer the payment of approximately $2 billion in excise taxes by two months to Jan. 15 of this year. Then, in mid-November, Congress passed the Air Transportation Safety and System Stabilization Act, which provided airlines with $2.4 billion to compensate them for direct losses related to the September attacks. Nonetheless, analysts fear the payments will not be enough to bail out all airlines, which face higher costs from new security procedures that make hubs less efficient and increase insurance rates.
The harsh market conditions have spilled over into the global transportation marketplace as well. "Internationally, nobody is in real good shape," says Scherck. "The international express carriers face steep fixed costs in a time of declining demand with no surface alternative." Observers don't expect the international market to improve anytime soon given the drop in freight volumes and the air carriers' additional security costs.
Staying Grounded
Domestically, parcel/express carriers, especially those with integrated air/ground networks, are faring much better than their air carrier brethren because they can offer a surface alternative. "When customers look to reduce costs," Scherck says, "multimodal carriers offer them the ability to migrate from overnight air to deferred air, and deferred air to truck."
"Parcel and express carriers live in two worlds now," adds Ed Wolfe, senior managing director, transport, logistics and supply chain of Bear Sterns. "Ground yields have held; air yields have not. If carriers have received any of the rate increases planned for air cargo over the past year, it's a small portion."
In an attempt to shore up its revenues, parcel carrier UPS raised commercial ground service rates by an average of 3.5 percent at the beginning of this year. But despite its recession-era timing, Wolfe does not foresee problems with the rate increase. "UPS has very high levels of customer service," he says. "The rate increases send a message that customers need to pay UPS for this level of service, including [the provision of] information."
Though a rate increase might bolster revenues, what the parcel/express industry really needs right now is an upswing in the economy. But recovery might take a few months at the very least. Scherck, for one, expects the economy to recover in the second half of this year.
A somewhat more optimistic indicator—a poll by the National Association of Business Economists—projects the United States will return to sustained, positive growth in the first half of 2002, led by the easing of monetary and fiscal policies. Wolfe agrees that an aggressive Fed monetary policy will result in a quicker recovery. However, he adds, "[w]e're not banking on a lot of short-term improvement."
Logistics Management: Management Update
08/31/2009
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