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An uplifting experience

The more you understand industry trends, the greater the opportunities for making wise choices about modes of shipping and alternative methods of cost effectively moving product.

For instance, carrier business has been rather flat over the last year or so, although investment firm Morgan Stanley (www.morgan-stanley.com) notes a recent uptick in air express domestic parcel volumes.

One reason for the flattening of revenues, according to Morgan Stanley, is that “[shippers] are substituting high-cost overnight air with cheaper ground service in an effort to lower costs, while electronic substitution continues to hurt envelope traffic.”

According to David Harris, associate director of Air Cargo Management Group (ACMG) and editor of its Cargo Facts newsletter (www.cargofacts.com), airfreight and express business has experienced mode shifts over the past year or so. The reason is that companies like FedEx and regional less-than-truckload (LTL) carriers have significantly improved their speed of delivery.

Robert Dahl, project director, ACMG, who oversees the organization's annual air freight and express study, agrees with Harris' observation. Where once LTL truckers were perceived to be providing inferior service compared to the air freight carriers, they're now adopting the same sorts of technologies and services that FedEx and UPS put into the air side of their business, such as track and trace capabilities and delivery guarantees, Dahl notes. “It is definitely true that surface delivery options are much better now than they were five and ten years ago,” he adds.

LTL carriers are offering time-definite service because they realize shippers are even more concerned with certainty than they are with transit time, says Brian Clancy, principal, MergeGlobal Inc. (www.mergeglobal.com). He sees inventory carrying costs as an important consideration for shippers.

“In a safety stock calculation, reliability is the key variable,” says Clancy. “The probability of a stock-out is directly a function of the reliability level, i.e., on-time performance. In that scenario, there's a lot of competitive substitution, meaning as shippers get smarter, they do a better job of managing inventory. Simultaneously, there are structural changes in their own supply chain networks that decrease the need for airfreight services.”

Besides the sluggish economy, there are some more subtle factors at work in diminishing transportation levels.

Theodore Scherck, president of The Colography Group Inc. (www.cologra-phy.com), cites what he calls diffusion, explaining, “Five or ten years ago, a company had more control of where its products were being shipped. Today, with e-commerce and the Internet, that control is gone. Orders can come from anywhere in the world. So, the ability to consolidate has been reduced. The shipper ends up with lower minimum order quantities, meaning they have to ship smaller shipments more frequently.

“The company's private fleets are less efficient,” Scherck continues. “Truckload ability is diminished, pushing shipments down to LTL. On the smaller end of LTL, shipments become smaller and smaller, making it more efficient to use small package services of the integrated carriers.”

Certainly there are a number of other factors changing the air freight and express market, some of which play to the strengths of integrated carriers.

“Shipments are just becoming smaller,” Scherck says, pointing to the replacement of ferrous metals and mechanical switches with plastics and electronics. “Goods themselves are lighter. The lighter they become, the more shipments become eligible for integrated carriers.”

While less-than-truckload (LTL) carriers are expanding their use of trucks to provide reliable services, the express companies are doing the same thing, and are providing a broader set of offerings, says Robert Dahl, project director of the Air Cargo Management Group. When FedEx and UPS first started their air services, they used a single central hub and moved all their air shipments through that hub, Dahl notes. Today, though, “Both use a lot more regional operations, which means that if something is moving less than 500 or 1,000 miles, it may well go on a truck, even if it's going UPS or FedEx,” he says.

This year domestic air cargo business is up 5% in revenue and 10% in weight, according to Scott Beale, UPS' director of cargo operations and marketing. UPS (www.ups.com) divides its package volume between air express and ground. In his segment of UPS operations, Beale's primary customers are freight forwarders, with whom he deals on a wholesale basis, delivering airport-to-airport.

Even though Beale deals with other segments of UPS, air cargo maintains a level playing field in terms of rates and space allocations in order to properly serve the general forwarding community. Last May, air cargo rebranded its priority and reserve shipments, with the introduction of UPS Air Cargo Priority. “It is the last cargo product taken off an airplane when capacity is limited,” explains Beale.

Aiming to become a bigger player in domestic cargo is DHL (www.dhlairborne.com), thanks to its purchase of Airborne earlier this year. Looking at the recent history of the industry, Rich Corrado, executive vice president for business development for DHL, says, “FedEx's acquisition of Viking and getting into the ground business changed the dynamic in the parcel business. When UPS responded and started guaranteeing ground delivery, shippers became more confident in using deferred and ground services as a substitute for overnight air.”

Shippers are much smarter today in making supply chain decisions, most observers agree. For example, Corrado notes that technology changes in the industry over the past three or four years allow shippers to service and rate shop, permitting better informed decisions. The ability to trace and track guaranteed delivery has also increased shipper confidence in integrated carriers.

Through its partnership with the U.S. Postal Service, DHL has rebranded a program now called DHL at Home, a residential delivery service for retail catalog companies and e-tailers.

Pilot Air Freight (www.pilotair.com), a provider of full-service transportation and logistics, had seen its air business eroding for many of the reasons covered here. Like DHL, Pilot has found its business growing, due in part to the success of its home delivery service. Frank Perri, Pilot's executive vice president for sales and marketing, notes that home delivery — and a booming international air freight business — has boosted overall business by 15% through October, year-over-year.

“We've expanded into the home delivery business, which is outside the scope of air freight in terms of transit times,” explains Perri.

Pilot is aware of the changing tides of air freight and express business as well as the changed requirements of shippers. “Due to the economy and company efforts to become more efficient and streamlined with their supply chains, there has been a divorce in thought from how product delivery is accomplished to being assured that it gets done,” Perri says. “For a long time the business has been mode neutral. Our experience is that consumers of transportation services are more geared toward the transit time and reliability of a shipment being delivered as opposed to the mode on which it travels.”

As the economy recovers, shippers need to remain aware of changing market conditions and the increasing number of shipping options. LT

U.S. domestic air express traffic
(daily shipments, 4th Quarter 2002)

Air Express Company 2002 Daily Volume Market Share

FedEx

2,828,000 41,4%
UPS 2,252,000 33.7%
Airborne Express 1,243,900 18.6%
USPS Express Mail 240,400 3.6%
DHL 61,000 0.9%
Others (incl. BAX Global & Emery) 50,000 0.8%
TOTAL 6,675,300 100%

Source: Air Cargo Mangement Group

What's up in domestic air cargo

  • Revenues for U.S. air freight and express were $27.3 billion in 2002, showing little change from 2001 numbers. Traffic grew by 1.8% in 2002, reaching 14 billion revenue ton miles.
  • Integrated carriers accounted for 90% of the industry's total domestic revenues. Freight forwarders working with combination carriers and all-cargo airlines handled some $2.45 billion, representing about 9% of the market. Domestic mail revenues were $431 million, less than 2% of the total.
  • Mail climbed 2% in 2002 over 2001 in cargo-ton-miles, representing 17% of the total. FedEx carries more than half of all U.S. domestic mail.
  • While combination carriers expanded time-definite and/or flight-specific air freight services, this didn't result in increases in market share vs. integrated carriers.
  • Security has replaced noise as the principal regulatory concern facing the industry.

Source: Air Cargo Management Group

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December, 2003

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