Air Shippers Hurt by Penny-Pinchers, Better Ground Service

Discussion in 'The Archives' started by my2cents, Jun 18, 2002.

  1. my2cents

    my2cents Guest

    Air Shippers Hurt by Penny-Pinchers, Better Ground Service
    Staff Reporter of THE WALL STREET JOURNAL
    June 18, 2002

    Frugal customers, combined with steady improvements in ground-based services, are taking the air out of express delivery.

    When the economy sank into recession last year, sportswear maker GFSI Inc. tightened its belt by shifting about 15% of its customer shipments from planes to trucks. It turned out to be a smart move: Boxes of customized T-shirts and baseball caps reached their destination as fast over the road as they had by air -- and usually at half the price or less.

    "I can't think of a good reason why you'd ever shift back" to paying extra for air delivery, says John Joerger, director of logistics and customs for the closely held Lenexa, Kan., company.

    That kind of thinking represents a big -- and profit-draining -- change for the $25 billion-a-year express-delivery industry, which is dominated by FedEx Corp. and United Parcel Service Inc. While most carriers move packages by air and ground, overnight air shipments often are their most lucrative business. Moreover, the typical ground delivery brings in about $6 in revenue at FedEx and UPS, compared with $13 for an air shipment.

    While the economy plays a role, the package companies also have themselves to blame for the switch by customers. As competition among them increased, FedEx, UPS and Airborne Inc., the industry's No. 3 player, have spent millions over the past few years to make their ground-based delivery services as reliable and high-tech as their air offerings. While shipments going about 500 miles or more usually still need to move by air to arrive the next day, many customers no longer have an incentive to spend the extra fees on express service for other types of shipments.

    One example: UPS charges $19.14 to ship a one-pound package the 214 miles from Boston to New York by its next-day air service, with a pledge to deliver it by 10:30 a.m. But it charges only $4.74 for the same package via its next-day ground service. The difference is that the ground-service package isn't promised to arrive until the end of the following day.

    Moreover, when customers do decide to pay extra for "air" service, their package may never see the inside of a plane. At U.S. Xpress Enterprises Inc., a Chattanooga, Tenn., trucking carrier, about a third of last year's revenue of $798 million came from hauling air and other expedited cargo for FedEx, UPS, Airborne and other air-freight carriers. "FedEx gets nervous when people start talking about their freight going by truck," says Max Fuller, chief executive of U.S. Xpress. "They try to create the mentality their freight is going on airplanes."

    These moves mean that many customers are avoiding higher-cost express service. At FedEx, such customers helped cause the first quarterly declines in its average daily volume of U.S. express shipments since it launched the industry in 1973. Next week, the Memphis, Tenn., company is expected to report its sixth consecutive quarterly decline in such shipments, following growth that averaged 3.1% in a two-year period right before the slump.

    UPS, which handles about 40% fewer overnight packages than FedEx, has seen the volume of those deliveries slip four quarters in a row. The dry spell has hit harder at Seattle-based Airborne, which has seen overnight shipments tumble by double-digit percentages since last year's third quarter. In previous downturns, express-delivery volume bounced back strongly as shipping customers revved up their supply chains and increased their willingness to pay for speed.

    Also spurring the shift are extra airport security measures added after last year's terrorist attacks, which caused delays for some air-freight shipments, particularly cargo riding in the bellies of passenger planes.

    "People are now aware of the [ground] service offerings that were out there before" but didn't receive as much notice, says Joe Bocian, manager of North American logistics and transportation at Parker Hannifin Corp., a maker of electromechanical controls and hydraulic parts. As a result, some of the Cleveland company's suppliers of raw materials are using trucking carriers that promise one-day delivery of small lots within about a 500-mile radius.

    To be sure, planes remain a must for long-distance overnight shipments and for a growing chunk of global trade. "You cannot drive a truck across the ocean," says Alan Graf Jr., FedEx's chief financial officer.

    Yet package carriers acknowledge that the glory days of U.S. express-delivery growth -- which averaged 9.7% a year at FedEx from 1995 to 1999 -- probably are in the past. "I wouldn't anticipate we'll go back to the days where everyone ships everything overnight," says Carl Donaway, Airborne's chairman and CEO.

    Ground packages take up the most space in the delivery truck, and the biggest carriers have raced to outdo each other with service enhancements. The biggest: In 1998, Atlanta-based UPS rolled out money-back guarantees for on-time delivery on all business-to-business shipments, blurring the dividing line between overnight shipments and ground service. UPS's aim was to demonstrate that its brown-truck delivery system was every bit as good as FedEx's vaunted air service at "absolutely, positively" guaranteeing delivery within a specified time period.

    Partially in response to UPS's moves, FedEx has spent $590 million over the past three years to expand its ground-delivery unit, operated separately from the much-bigger FedEx air-express system, into one of the company's primary engines for profit growth. And Airborne, long known as the industry's bargain-basement provider of air deliveries, last year launched its own ground service.

    The carriers, in fact, have boosted the on-time record of ground deliveries to the same near-perfect record of air packages, says Doug Caldwell, an analyst at AFMS Transportation Management Group, a Portland, Ore., consulting firm that helps companies negotiate delivery contracts.

    Some industry-watchers don't blame the three main package shippers for improving their ground service. "If there is an opportunity to cannibalize their air products, they are better off doing it themselves than losing [those packages] to someone else," says Satish Jindel, a transportation consultant at SJ Consulting Group Inc. in Pittsburgh.

    -- Daniel Machalaba contributed to this article.
  2. peacock71

    peacock71 Guest

    The usual issue with these articles is that when you combine air and ground, UPS delivers far more overnight packages than the rest, put together. The journalists still don't get it.

    Go UPS!