Express: Competition heats up

Express carriers try to outdo each other with new services. Meanwhile, a formidable new competitor lurks on the horizon.

By Toby B Gooley -- Logistics Management, 7/1/1998

Do you remember when Federal Express introduced guaranteed express delivery to the general public? Though the service was revolutionary at the time, U.S. business quickly adopted the idea and the expression "FedEx it" became synonymous with shipping a document or package overnight.

Today, FedEx continues to dominate certain segments of the parcel-express industry, but it no longer has the field to itself. As the number of major players has grown, the industry has come to be characterized by feverish competition among package-express carriers.

And the express-package business is worth competing for: In the first three quarters of 1997, U.S. businesses shipped approximately 526 million documents (defined as letters and envelopes) overnight, which translated into $6.38 billion in revenues, according to industry consultants The Colography Group.

Nowhere is the competitive nature of the parcel-express business so clear as in the area of delivery options. Shippers can choose from a vast array of products that offer different costs, transit times, day-of-the-week availability, and time of delivery. Is so much variety really necessary? Not only necessary, but customers demand it, says James Lyski, FedEx's vice president for U.S. marketing.

Though carrier executives expect the trend toward more finely differentiated products to continue, at least one consultant disagrees. Satish Jindel, principal of SJ Consulting in Pittsburgh, predicts that express service menus will be simpler in the future. One reason is to streamline operations and reduce costs. Another is the introduction of money-back guarantees by UPS and FedEx subsidiary RPS for ground-delivery services. Shippers are more concerned with transit times and cost than mode of transportation, he says. Once they discover the cheaper guaranteed ground services, many will stop using air services that offer the same transit times at a higher price. Not surprisingly, the carriers disagree, contending that guaranteed ground service will complement, not replace, air-express services.

Express carriers also are focusing on information technology. All of the major carriers offer online tracking and tracing, electronic data interchange, interactive services like rate calculation through their Internet sites, and automated shipping systems.

But what was revolutionary a few years ago is no longer enough to stay in the game. Today, express carriers are spending millions to develop information products they believe will give them a competitive edge. RPS's information system, for example, lets both shippers and consignees gain access to shipment details. Bram Johnson, RPS's senior vice president of marketing and strategic planning, believes that is the way of the future. "The consignee is king," he says, "and that will redefine the business."

United Parcel Service, meanwhile, is trying to recast itself as an information-management company. In March, the carrier introduced a service providing secure delivery and archiving of documents via the Internet. UPS also has signed agreements with several software companies to embed UPS's functionality into their products. That doesn't mean UPS is moving away from its package-delivery business, says UPS vice president John Nallin. Rather, the company's goal is to be able to enter the business process at any point, as a provider of logistics services as well as of electronic-commerce solutions, he says.

A third competitive strategy is to offer customized third-party logistics services such as centralized warehousing and inventory management for critical parts, same-day courier service, and value-added services such as order processing and technical repairs. Examples of companies that offer these services include UPS Worldwide Logistics, Emery's Logistics Worldwide, and Airborne Express.

Plenty to Worry About

Despite the apparent success of these strategies, express-package carriers still have plenty to worry about. For one thing, says Mike Beining, senior vice president, sales for BAX Global, the integrated carriers are not making enough money to pay for more infrastructure. "Domestically, none of the integrators are [receiving] appropriate returns on capital to continue major investments," he says. That is likely to lead to higher prices for express services, he predicts. "If everyone is making less than 5 percent on sales, there has to be a firming in pricing. Otherwise, we can't invest in the assets that customers need for us to provide service to them."

Another issue for national carriers is the increasing viability of regional competitors. Because many shippers base their routing decisions on transit time, regional carriers that offer overnight and two-day service are making some inroads in their business. Regional carriers also are winning converts because of their flexibility in scheduling, says Jim Berluti, president of Eastern Connection, a regional courier serving the East Coast. "We're not bound by an airline schedule, so ... we can leave much later and still deliver earlier. And we often can beat [a national carrier's] rate."

Perhaps the biggest issue looming on the horizon is the U.S. Postal Service's plan to implement tracking and tracing capabilities for its priority mail service. Once that is in place, Jindel says, USPS will be able to guarantee two- and three-day delivery at lower prices than the major package carriers can offer.

The package carriers are concerned about that possibility. They say that USPS is using its monopoly on mail service to subsidize express products that compete with private companies. Not only does that give the Postal Service an unfair funding advantage, they argue, but it also places the federal government in the position of competing with private enterprise. The package-express carriers are ready to fight: UPS Chairman and CEO James Kelly has said that his company would lead the charge to prevent the Postal Service from offering products at unfairly low prices.

The competition in the express-package arena has not yet peaked. UPS and FedEx will continue to dominate in terms of freight volumes as well as in introduction of new products. But the competitors are closing the technology and service gap while keeping their prices down--making them more attractive than ever to many shippers.

Parcel Carriers (Ground) -- 1997 vs. 1996

[Thousands of Dollars]

1997 1996 % 1997 1996 % 1996 1997 % Carrier Revenue Revenue Change Net Inc. Net Inc. Change O.R. O.R. Change

UPS $22,458,000 $22,368,000 0.4% $909,000 $1,146,000 -20.7% 92.4 90.9 1.5

RPS 1,581,754 1,344,307 17.7% N.R. N.R. N.A. 89.5 89.9 -0.4

TOTAL $24,039,754 $23,712,307 1.4% N.A. N.A. N.A. 92.2 90.8 1.4

N.R. means not reported, N.A. means not available Source: Transportation Technical Services

Express Carriers (Air) - 1997

[Millions of Dollars]

1997 Cargo 1997 Operating Operating Net Freight Ton

Carrier Revenues Revenues Profit Profit/Loss Miles (mil)

Airborne Express 890 894 98 97 577.8