Domestic parcel rates may not be moving up very quickly, but shippers can expect to see surcharges in the coming year, says James Valentine, a senior analyst with equity research firm Morgan Stanley.
Based on a recent survey of parcel shippers, Valentine sees overcapacity holding rates down — shipper expectations are for a 1.2% rate increase from UPS ground and a net decrease of 0.3% from FedEx ground. However, there is currently no ground fuel surcharge, but this could easily change in 2005, Valentine states.
FedEx has been growing its ground business at 10% per year, says Valentine, and now DHL has expanded its presence in both the ground and air parcel segments. UPS as well has grown its air business, a market which Valentine says is only increasing at 1% to 2% per year over the last six or seven years.
Shippers no longer differentiate between FedEx air and UPS air on service, according to the Morgan Stanley survey. Though there is a slightly larger gap in perceived service quality on the ground service, FedEx's aggressive pricing seems to balance a slight edge in service at UPS. With limited overall growth in volumes, the battle lines are drawn on market share, and increasingly, this means shippers have benefited from slower price inflation.
DHL, which has poured $100 million into advertising in North America, will continue those efforts to build brand recognition. For the time being, price of service is best for DHL, says Valentine. But as the lowest priced carrier in the sector, DHL will lose over $500 million in North America in 2004, and Valentine estimates it will lose a further $200 to $300 million in 2005.
Change is in the wind, however, for a minority of shippers. In the past 12 months, 13% say they changed their primary domestic carrier. The principal reason for changing parcel carriers is price (59%) or price and service (26%), which yields a significant 85% of the change being driven in full or in part by price. Service was cited by only 7% of those shippers who changed carriers. That total was 59% in the prior survey in March 2004, leading Valentine to conclude that pricing has become a much bigger differentiating factor among domestic parcel carriers.
Perhaps a driver of the price sensitivity in parcel shipping is the fact 71% of shippers say their companies have encouraged more use of deferred air and ground services to replace overnight express shipments. Shippers under pressure to shift to lower-priced service levels are split in their reaction. While only 2% of those shippers say they intend to shift volumes back to overnight air, 43% say they will continue shifting to deferred services. Of the remainder, 53% say they won't change their current mix.