It's the highway not the skyway

In a bid to save money, shippers are shifting more of their time-definite freight from air to ground carriers.

By -- Logistics Management, 10/1/2000

Expedited transportation in the United States has become "grounded"-so to speak. It wasn't so long ago-back in the '90s, in fact-when expedited shipping meant sending freight via an airfreight or integrated carrier. But today, the trucking companies have wrested a large share of the expedited transportation market from those airfreight and integrated carriers.

"We are seeing a reversal of the mid-'90s, when growth in deferred air [shipments] drove the domestic [expedited-transportation] market," observes Ted Scherck, president of the Atlanta-based Colography Group, a market research and consulting firm specializing in air transportation. "A lot of what went via deferred air is now going to shorthaul regional truck and ground guaranteed service."

Delivery-time guarantees supported by the latest information technology have helped drive the switch. Firm motor carrier commitments that include free shipping to compensate for service failures have also contributed to the change. But most important of all, motor carriers can provide the same time-guaranteed service as their air-carrier brethren can, but at a much lower cost. "The service provided by ground and air [carriers] is getting closer," notes Ed Wolfe, senior transportation and logistics analyst at Bear Stearns & Co. in Manhattan. "But ground service is a lot less expensive."

The Surge in Expedited Services

The term expedited transportation refers to any shipment for which pickup is requested and which is made with a specific delivery guarantee, whether it is handled by an air or motor carrier. "Expedited transportation is anything that moves on a distribution system designed to produce short and predictable transit times," Scherck notes. "In the United States, that's less than five days."

In recent years, the market for expedited transportation has taken off. Colography has predicted that the U.S. expedited market will generate $82.4 billion in revenue this year-a 5.7-percent gain over 1999's levels. Colography defines that market as including all shipments moved by domestic air, ground-parcel, less-than-truckload, and air-export services. Shippers made 6.6 billion expedited shipments during calendar year 1999, according to the consulting firm, and Colography expects that number to reach 6.8 billion this year. (See the chart on Page 88.)

During the '90s, shippers turned increasingly to expedited transportation as businesses reduced their inventory stockpiles and shortened their supply chains-a strategy that entails a certain amount of risk. "If you set up an efficient supply chain, you put yourself at risk," Scherck explains. "Any kind of interruption becomes more severe than if you had safety stocks. Any kind of outage-whether labor or weather-becomes more significant."

When emergencies or surges in product sales occurred, shippers initially turned to air carriers that could promise swift deliveries, often overnight. But overnight airfreight deliveries proved too expensive a proposition for many commercial shippers, especially those moving heavier freight than packages. Instead, many began opting for two- or three-day service, known as deferred transportation, which still represented a shorter transit time than most standard trucking schedules.

In the beginning, air carriers competed with the integrated carriers, which operated both fleets of trucks and airplanes, for these time-definite shipments. But these carriers quickly realized that shipping via truck could be just as quick for a short-haul shipment in a regional market. Instead of moving the freight through their air-express hubs, some of the integrated carriers began moving their deferred freight via ground in certain regional markets, using trucks rather than a combination of air and truck services.

As the integrated carriers started to shift time-definite movements from air to ground, a trucking company called Roberts Express in Akron, Ohio-today known as FedEx Custom Critical-began drawing interest by offering dedicated ground transportation for emergency shipments. A number of major motor carriers took note of the expedited phenomenon and responded by offering their own services catering to companies needing rapid transit. "Almost every LTL carrier has woken up," says industry observer Satish Jindel, president of SJ Consulting Group Inc. in Pittsburgh. "These carriers asked themselves, 'Why don't I just guarantee the service and get a premium price for it?' [The carriers] are making more money and their customers are happier."

LTLs Join the Fray

Drawn by the prospect of higher profit margins for expedited service, the leading LTL carriers have indeed jumped into the game. In 1996, Consolidated Freightways started an expedited service called "CF Prime Time Air." That service provides airfreight forwarding as well as expedited ground transportation service.

Two years ago, another leading LTL carrier, Yellow Corp. in Overland Park, Kan., launched a time-definite service dubbed "Exact Express." Exact Express handles multiple shipments, generally moving them via truck. "It's guaranteed delivery by the hour," says Yellow spokesman Roger Dick, who notes that the mode of transport is less important than meeting the delivery deadlines. "Although most freight moves by truck, we'll put it on a plane if we have to," Dick says, adding that Exact Express earned about $80 million in revenue last year.

The other big LTL carrier, Roadway Express, also has an expedited offering. That service, called "Time-Critical," went coast to coast in September 1999, offering two- to three-day delivery between numerous service points. In the press release announcing the service expansion, Roadway Express noted that these kinds of transit times were previously only available through airfreight service.

A number of regional truckers have also entered this market. For example, American Freightways Corp. in Harrison, Ark., last year launched a day-definite delivery service called American Flyer Guaranteed and a time-definite service called American Expediter. American Freightways generally can offer next-day shipment within a radius of 600 miles and second-day service within 1,500 miles.

Motor carriers have won over skeptical shippers by offering money-back guarantees for service failures. American Freightways says the shipper does not pay if American Flyer and American Expediter don't meet the original delivery obligation. Another expedited service provider, Con-Way Now based in Ann Arbor, Mich., promises to take 50 percent off a shipper's freight bill if a shipment arrives more than two hours late. The carrier will not invoice the shipper at all if the shipment shows up more than four hours later than promised.

Interestingly, Con-Way Now this past March introduced an air option for shippers that places the freight on the next commercial flight and guarantees delivery for a specific hour. Indeed, the lines of demarcation between the modes are blurring as truckers such as Con-Way move urgent shipments via air to maintain shipper loyalty. "There are no clear lines of distinction between competitors anymore," Scherck notes. "If you're in the second-day business, you compete against airlines, trucking companies, integrated carriers, and package distribution companies."

Savings for Shippers

In any event, the entry of truckers into the expedited-delivery market has had one enormous benefit for shippers; motor carriers generally offer time-definite, expedited service at far less cost than air carriers can. For example, Daylight Transport, an LTL carrier that specializes in expedited service, says its rate of $44 per l00 pounds is much lower than the standard two- to three-day air rate, which averages between $60 and $80 per 100 pounds. "The LTL-based expedited services are airfreight forwarding under a slightly different guise," says Scott Riddle, director of marketing at the Long Beach, Calif.-based trucker.

Riddle also notes that many motor carriers offer a simplified pricing scheme that shippers find attractive. Traditional air carriers tack on added fees such as beyond-charges and dimensional-weight charges. "You get a rate quote," says Riddle, "and by the time you finish with all the extra fees, your cost is 30 percent higher than you thought it would be."

Recognizing the savings opportunities offered by motor carriers, shippers have begun switching more of their freight from air to the lower-cost trucking services. "People were needlessly paying for air freight," notes Randy Garber, a vice president with the consulting firm A.T. Kearney in Alexandria, Va. "You have shippers becoming more sophisticated. They are seeking the lowest-cost mode that will meet their service requirements. In many cases, they have found that truckers could meet their needs at a fraction of the cost of air."

Transportation analyst Ed Wolfe agrees that shippers are increasingly taking advantage of the motor carrier services for their expedited freight. "We're seeing a migration back toward the ground, where it's cheaper," he says.

But that doesn't mean shippers aren't willing to pay more for expedited delivery than they do for standard service, Wolfe hastens to add. "Shippers understand the value of reliable information and time-definite service," he notes. "The service level outweighs the extra cost of expedited transportation, and people are willing to pay up."

Truckers Gain Ground

As shippers turn to expedited trucking services, the air and integrated carriers are taking a hit. "The LTL carriers' express services are growing at 30 or 40 percent," says consultant Jindel, "and it's business that is being taken away from BAX and Emery (two integrated carriers that traditionally specialized in heavy freight)."

But the integrated and air carriers are fighting back. "The traditional air carriers such as FedEx are reacting to the needs of their customers and putting up regional shorthaul distribution systems to accommodate this need," notes Scherck.

Jindel believes that time is running out for the air and integrated carriers to respond to the truckers' growing dominance of the time-definite market. "Companies like Emery and BAX need to align with others to provide a ground network or put together a strong ground network themselves," he says. "But time is critical for them."

As the carriers re-engineer their services to provide time-definite delivery, Scherck foresees a continuing blurring of the distinctions between modes as the players come to accept that they're selling transit time, rather than an equipment-based service. "Shippers buy transit time rather than vehicle type," he points out. "You're seeing a convergence of the modes. You have trucking companies putting up air-forwarding operations. You have rails buying truck operations."

In fact, the current expedited-service marketplace, which is dominated by truckers at the moment, could change as other carriers reshape their offerings to meet shippers' demands for consistent, rapid guaranteed service. "If you think the last 10 years were tumultuous," observes Scherck, "you ain't seen nothing yet."