Parcel shipping: DHL's U.S. exodus alters domestic package landscape
Jeff Berman, Group News Editor -- Logistics Management, 11/17/2008
WALTHAM, Mass.—With last week’s news that DHL will soon be eliminating domestic-only air and ground services to focus only on international import and export offerings in the United States, it stands to reason that the domestic package volume DHL handled will be largely absorbed by industry bellwethers UPS and FedEx, as well as the United States Postal Service (USPS), according to industry analysts.
Stifel Nicolaus analyst David Ross said in a research note that it is possible that the U.S. parcel market will return to a basic duopoly until the USPS makes major technology, pricing, and operational improvements. Ross also noted that according to Stifel’s estimates there is $3.4 billion in small package revenue to be divided among the remaining U.S. players with DHL set to leave the U.S. market, with its domestic pricing 17 percent below FedEx and UPS on air business and 5 percent below, on average, on ground business. Ross also commented that FedEx and UPS should benefit from DHL’s exit through increased volume and better pricing, and he said UPS should also benefit from a potential contract to handle DHL’s airlift for its remaining international packages.
As LM had previously reported, domestic market and economic conditions—and an uphill battle for market share against UPS and FedEx since acquiring Airborne Express in 2003—took a toll on DHL. In recent months, its domestic problems were exacerbated, with reports of ongoing service issues, large job cuts, and a pending ten-year, $10-billion contract with UPS for airlift capacity to reduce its ground infrastructure operations (due to last week’s news, it is likely the parameters of this deal will change if it is consummated).
This news comes at a time when the global financial markets are on the shakiest ground in decades, the economy is in recession-like conditions and and retail sales dropped 2.8 percent in October, according to the U.S. Department of Commerce.
Despite this current environment, DHL’s domestic exodus appears to be paving the way for FedEx and UPS to take advantage of having one less major player in the market going forward in the form of 2009 rate increases.
In mid-October, UPS announced it plans to increase rates for UPS Ground by 5.9 percent on average, with an average net increase of 4.9 percent on all air, express, and U.S. origin international shipments. UPS said that the rate increase for air express and international shipments is based on a 6.9 percent increase in the base rate, minus a two percent reduction in the air and international fuel surcharge. These rate increases will take effect on January 5, 2009.
“This is the largest increase in recent memory from UPS since it had been in negotiations with DHL last May,” said Jerry Hempstead, president of Orlando, Fla.-based Hempstead Consulting in a recent interview. “UPS knew that DHL was not going to be a domestic challenger in the upcoming year. Now it's a two horse race. FedEx will set the pace of the air express pricing and UPS will dictate where ground prices go.”
Last week, FedEx said it will raise the standard list rates for FedEx Ground and FedEx Home Delivery by an average of 5.9 percent, which will also kick in on January 5, 2009. And when the company released its fiscal first quarter earnings last September, it said Express rates would increase by an average of 6.9 percent for U.S. and export services. Like UPS, FedEx said that the rate increase will be partially offset by adjusting the fuel price at which the fuel surcharge begins, reducing the fuel surcharge by two percentage points. And the USPS recently said that effective January 18, 2009, Express Mail and Priority Mail rates will rise 5.7 percent and 3.9 percent, respectively.
Ed Wolfe, president of Wolfe Research wrote in a recent client note that by exiting the domestic parcel market, DHL is “walking away” from roughly $3.1 billion in U.S. revenue when it officially ceases U.S. domestic business on January 31, 2009. This, Wolfe wrote is likely to have a significant potential positive impact for both UPS and FedEx in the U.S. market, where DHL has traditionally offered lower rates.
But even with DHL leaving the U.S. and FedEx and UPS’ “pricing firming with respects to DHL customers,” Wolfe does not expect a material improvement in pricing until the market improves. And he said that it is likely that the DHL announcement will lead to pricing getting worse in the near-term, although over time it could lead to multiple points of improved pricing.
Shipper impact: With DHL leaving the domestic market, shippers that have used the company need to be exploring their options, said Doug Caldwell, executive vice president of ParcelPool, a small parcel delivery consultancy and services provider.
“DHL is on its way to winding down [in the domestic market],” said Caldwell. “Shippers need to be looking at UPS, FedEx, and smaller, regional carriers as possible options. Those other carriers are hungry right now, too, and even though shippers may end up paying more than they did with DHL, it is a buyer’s market right now…particularly in light of the fact that UPS, FedEx and the USPS are all raising their rates in January.”
Caldwell added that going forward delivery guarantees on DHL domestic shipments are suspended, which is telling because it may lead to service disruptions as DHL winds down domestic operations and more volume leaves its system.
Going forward, Caldwell said it is still too early to tell what will happen in the battle for DHL market share among UPS, FedEx and the USPS, though, and its impact on pricing, with rates likely to continue going up.
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