DHL crashes the party (part 2)

-- Logistics Management, 8/1/2005

Page 2 of 3
Helping to raise on-time delivery rates is the carrier's aggressive infrastructure program. Some of DHL's current projects include expanding its Wilmington, Ohio, hub by adding a new sortation center there. It also will open a new air and ground facility in Southern California, and is "rapidly and very dramatically" expanding its East Coast distribution hub in Allentown, Pa., Baker says. Geographic coverage through a network of independent contractors, moreover, now reaches every U.S. ZIP code, the company says.

"Our focus throughout the integration [with Airborne Express] has been on the impact to the customer," Baker says. "Our hard work has paid off in better operational levels than ever before."

No Price War in Sight

The importance of service quality can't be underestimated, Broughton believes. "There is an axiom in transportation: Price may get you in the door, but service will keep you there," he says. "That axiom is truer in parcel and air freight than in other modes. If you want to fight a price war, you have to have service to stay in the battle."

But other analysts consulted for this article don't expect DHL's aggressive stance to spark intense pricing competition. "We don't believe a price war is in the cards," says Ted Scherck, president of The Colography Group. "Pricing is rational but competitive."

"We don't see DHL/Airborne causing a price war," agrees Michael Erickson, president and CEO of Portland, Ore.-based consulting firm AFMS and a former Airborne Express executive. "Airborne always offered low rates. In a few years, when DHL's service gets better ... then you may see more of a battle. But Airborne has always priced aggressively," he says.

DHL doesn't need to worry much about pricing, suggests one analyst. "Demand for services is increasing at such a rate they don't have to use pricing to get the business," says Satish Jindel, principal of SJ Consulting in Pittsburgh. Much of that growth has come from the conversion of less-than-truckload (LTL) to parcel shipments, he says. There's so much business to be had, Jindel adds, that some LTL carriers are lowering their weight thresholds to attract lucrative parcel traffic.

Besides, margins are so thin that the industry could hardly afford a pricing war. The market will not allow carriers to raise prices, except via fuel surcharges, Scherck says. Last year, the announced average rate increase for ground parcel shipments was 1.9 percent. According to Scherck's analysis, fuel surcharges allowed parcel carriers to realize yield growth of 3.4 percent. With inflation at 2.7 percent last year, however, the effective increase in net yield for the four largest parcel carriers was a scant 0.7 percent, he explains. Moreover, 2004 was the third straight year of declining effective net yields, starting with 1.9 percent in 2002, followed by 1.6 percent in 2003 and 0.7 percent last year.

Mike Regan, president of freight payment company Tranzact Technologies, says the bottom line for shippers is that parcel rates have stayed competitive. "There is value in having a viable third entry that has access to deep pockets," he says.

The Competition Continues

The major parcel carriers may be unlikely to engage in a price war, but they'll continue their fierce competition on other battlefields.

"Competition is always going to make UPS better," says UPS spokeswoman Susan Rosenberg. "It's not always price. Customers have a variety of needs, and price is one component. What we're hearing from our customers is, 'What kind of value can you add? What kind of technology solutions do you have?' "

Like DHL, UPS and FedEx are banking on integrated domestic and international services to attract business. "Our ace in the hole is our single integrated global network," Rosenberg says. "Air, ground, parcel, express, international, it's all going to the same delivery center and on the same vehicle."

Indeed, FedEx and UPS have been making inroads into DHL's international volumes, and all three carriers are aggressively expanding in China, where the potential for growth is greatest. Continued...

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