Big battle for small packages

As UPS fights to regain business lost during the 1997 Teamsters strike, rival carriers say they've made greater inroads than ever into Big Brown's territory.

By By Marcia Jedd -- Logistics Management, 2/1/1999

Ross-Simons, a jewelry catalog company based in Cranston, R.I., was one of many shippers that relied on United Parcel Service (UPS) as its primary package carrier before the International Brotherhood of Teamsters struck UPS in August 1997.

Prior to the strike, Ross-Simons moved nearly 90 percent of its volumes with UPS. Since then, the company has been giving some of that business to the U.S. Postal Service (USPS) and FedEx. "UPS only has about 50 percent of our volume now. The strike woke a lot of us in the mail-order industry up [to the fact] that you can't always count on something," says Peter Howard, vice president at Ross-Simons.

By all accounts, UPS lost market share as a result of the strike, which forced millions of packages onto planes and trucks belonging to rival express carriers, forwarders, USPS, and other transportation providers. Many of those carriers have retained some business from new customers like Ross-Simons.

UPS continues battling to regain that lost business. Big Brown's competitors, meanwhile, are equally determined to keep their newfound bounty.

Continuing Friction

UPS still is recovering from the effects of the Teamsters' job action. By the time the 15-day strike was settled, the carrier had lost more than 7 percent of its average prestrike daily volume of 12 million packages and was faced with a backlog of some 90 million packages. UPS attri-butes $775 million in lost revenues in 1997 to the strike. The company finished 1997 with $900 million in net earnings on $22.9 billion in revenues.

Once the strike had been settled and the two sides had signed a five-year contract, UPS launched a campaign to win its customers back. "Every regular customer received a phone call or personal visit," says Norman Black, a representative at UPS corporate headquarters in Atlanta, Ga. "We told our customers to put their trust back in UPS because we got the five-year contract with the Teamsters, the longest in history." UPS also offered pricing incentives to high-volume customers for about six weeks following the strike, says Black.

The carrier has been partially successful in wooing back its customers, says Ted Scherck, president of the Colography Group Inc., an expedited-transportation research firm in Marietta, Ga. Scherck and other experts say UPS made a stronger comeback in domestic and international air packages than it did in its ground business. There also have been less-tangible effects on the carrier's business: "The strike interrupted UPS's growth momentum. It's a lot like compounding money in your bank account. It's very difficult to [make up for that] lost opportunity," he observes.

Even though the carrier now has that five-year contract in hand, it hasn't exactly been smooth sailing between UPS and the Teamsters. The contract requires that, once the carrier reaches pre-strike shipment volumes, it will create at least 2,000 full-time jobs each year for a total of 10,000 full-time jobs over the contract's term. These jobs would be offered to part-time employees at the carrier's package-handling centers. The contract also requires UPS to create at least 2,000 full-time drivers' positions annually after pre-strike shipment levels have been reached. Those positions would be filled by current part-time employees.

UPS currently employs about 185,000 Teamsters, either as part-time distribution-center workers or full-time drivers. That's 10,000 fewer union employees than were employed prior to the strike, says Black. Although UPS still had not achieved its pre-strike volumes--shipments remained down by about 1 percent as of Sept. 30--the Teamsters last summer filed a grievance against the carrier. After progressing through several local and national dispute-resolution steps as required by the contract, that complaint now is in the hands of the American Arbitration Association.

Union leadership insists that UPS still should have created the 2,000 drivers' jobs in the first year following the strike since shipment volumes were nearly back to normal, and accuses the company of trying to avoid its obligations under the contract. "Corporate America has become addicted to using part-time employees at the expense of working families," contends Craig Merrilees, representative for the International Brotherhood of Teamsters. "Basically, UPS doesn't want to provide the 10,000 full-time jobs [it] agreed to."

The case is expected to be heard early this year. Meanwhile, UPS was expected to reach pre-strike volume levels by the end of 1998, but that and other fourth-quarter information will not be released until sometime this month.

Competitors Reap Benefits

It's widely acknowledged that the Teamsters' strike against UPS benefited the competition by creating an opportunity for transportation providers to serve--and perhaps impress--millions of UPS customers. But just how much those competitors benefited from the strike's effects is hard to quantify, say industry experts.

Estimates of UPS's share of the domestic express-package market vary somewhat. An analysis by the Colography Group found that by the first half of 1998, UPS had less than 30 percent of the U.S. expedited-cargo market on a revenue basis. The market, valued at nearly $35 billion, includes U.S. domestic air, ground parcel, and LTL shipments as well as air-export shipments. (See Figure 1.)

It's difficult to quantify aggregate losses from the strike because the U.S. expedited market has continued to expand, despite the worldwide economic downturn, says Doug Rockel, an analyst at investment firm ING Baring Furman Selz LLC in New York. "The express-industry dynamics are still positive, especially the small-package airfreight segment," he notes.

Rockel notes that some of the biggest beneficiaries of the strike continue to be USPS and Pittsburgh, Pa.-based RPS, a subsidiary of FDX Corp. Bram Johnson, vice president for marketing and strategic planning at RPS, confirms that his company has retained a significant amount of the new business it gained during the Teamsters' action. RPS now handles some 1.5 million packages a day, compared to its 1.2 million daily pre-strike average, he says. "We kept about 10 percent above what we normally had [before the strike]. The strike raised awareness of RPS substantially," he says.

At RPS's sister company, FedEx, spikes in express volumes during the 15-day strike period drove up corporate earnings handsomely. The express giant added some 850,000 daily express shipments to its normal daily average of 3.5 to 4 million parcels and documents. "We saw more two- and three-day shipments in particular," says Sally Davenport, a FedEx representative in Memphis, Tenn. As for market-share gains since, she adds, "It's extremely difficult with the growth of the market [to tell] whether growth is incremental or a result of the strike." FedEx is the largest unit under FDX Corp., a $16 billion holding company that includes RPS, Roberts Express, Viking Freight, and Caliber Logistics. FDX's units held a combined total of nearly 20 percent of the U.S. expedited-cargo market in 1998, according to the Colography Group.

At USPS, volumes for Express Mail and Priority Mail surged 70 percent and 50 percent, respectively, during the Teamsters' strike, notes Sandra Harding, a representative at USPS headquarters in Washington, D.C. USPS, which delivers six million Express Mail, Priority Mail, and parcel-post packages daily, is second only to UPS in expedited-package volumes. On a revenue basis, however, USPS holds less than a 3.0-percent share of the U.S. expedited market, according to Colography Group research.

Because it is a low-cost provider, USPS may have the most to gain in market share--if it can continue to improve service. Harding says focus-group research at USPS revealed that the key concern among shippers was verifying that a package had been delivered. For that reason, USPS later this year will launch a delivery-confirmation program that uses hand-held scanners and bar-coded labels. "We're also looking at developing a tracing program, but this is a five-year plan," says Harding, adding that USPS's reliance on several airlines to carry express packages means that it is unlikely to offer in-transit tracking. Harding expects that last year's addition of 10 new distribution centers on the East Coast under the agency's contract with CNF Transportation's Emery unit also will improve expedited service.

Regional package-delivery companies also saw package volumes jump during the strike; they, too, are finding that many of those new customers are here to stay. James Berluti, president and CEO of Wellesley, Mass.-based Eastern Connection, estimates that since the strike, his company's shipment volumes have increased some 5 to 10 percent. He notes that it is difficult to gauge how much of that increase can be attributed to the strike against UPS.

There's no question, though, that Eastern Connection and other regionals have benefited at UPS's expense. "What's interesting is that we started to keep a lot of that business. [Customers] realized that we weren't [just] a ground carrier, that we're focused on the express market," Berluti says. He believes that regional carriers' flexibility, later cut-off times, and ability to customize service has helped them keep customers that gave them a try during the strike.

Even third-party logistics companies picked up extra business as a result of UPS's near shutdown. "We were affected positively in that we did a lot more consolidation work for customers. The strike gave us an opportunity to provide warehousing and transportation services we normally wouldn't provide," says Russ Dixon, marketing director for Jacksonville, Fla.-based GATX Logistics Inc. For a large personal-computer manufacturer, for example, GATX matched products with UPS shipment numbers in order to merge them with other components for the same order. Once they were complete, shipments were routed to the customer via LTL common carriers contracted by GATX, rather than via UPS as originally planned.

GATX, together with Lockheed Martin Postal Systems, recently launched a service called "Paxis" that may steer even more shipments away from parcel carriers like UPS. In January, the U.S. Postal Service implemented rate reductions for consolidated package shipments. Paxis lets parcel shippers take advantage of those discounts by combining GATX's logistics-management capabilities with Lockheed Martin's postal information-technology systems. The service provides consolidation and distribution of non-expedited ground parcel shipments, including package pickup, USPS bar-code application, computerized manifesting, sortation and containerization by ZIP code, and transportation to the most economical point of entry into the USPS system.

Shippers Rethink Strategies

In the months since the strike, UPS and competitors like FedEx and RPS have continued to up the service ante, adding to the plethora of service options. Many expedited carriers, for example, currently are making deferred two- and three-day services more reliable by offering delivery guarantees. UPS regained some customer confidence with a ground-delivery guarantee program launched last May. RPS followed with a similar program shortly afterwards. Carriers also have been competing to offer more time-definite service options.

Perhaps the most important consequence of the Teamsters' strike against UPS is that--like the union's strike against the largest LTL carriers in 1994--it caused shippers to rethink their transportation strategies. When catalog marketer Ross-Simons permanently shifted about 35 percent of its volume from UPS to the U.S. Postal Service following the strike, it realized savings. The shipper also got better service than it had expected. "The USPS has made a valiant effort to improve its parcel post and priority mail," says Howard. "It has expanded weight limitations and made a big commitment to improve its two- to three-day service."

Ross-Simons is just one of thousands of shippers that have shifted business around in the wake of last year's strike. "Shippers have made a conscious decision not to put all their eggs in one basket. To protect yourself from an outage is something prudent shippers are doing," says Scherck. And although they may be wise to do so, they should be aware that it won't necessarily make life easier. "There's a price to be paid," he warns, "[in] the complexity of handling different carriers."

Marcia Jedd writes frequently on logistics and transportation issues.