Parcel Landscape an Orderly Oligopoly

The last analyst day at UPS was held in November 2006 and featured Michael Eskew as CEO. The company has made significant progress on multiple fronts since then, according to John Larkin of Stifel Nicolaus. “It has effectuated a turn around in its supply chain solutions unit through systems integration and the elimination of duplicate overhead structures,” he says. It has also dealt with a potential liability associated with its exposure to the underfunded Central States multi-employer pension fund. And it avoided potential market share losses by negotiating a contract with the International Brotherhood of Teamsters eight months in advance of the expiration of the old contract.

Domestic package volumes have been weak, noted Larkin, and for the last six weeks, US package volumes have been down about 2% year on year. The same is not true of the company's international market, as the weak dollar has helped fuel a surge in exports.

The company will use its cash for a stock repurchase program, not major acquisitions, though UPS did announce a small acquisition of a parcel agent in Romania. Further acquisitions are likely in the same form to fill out the company's network in developing markets.

On the competitive front, “no one seems willing to step out of line with respect to sacrificing price for increased market share,” says Larkin. Even weak domestic volumes aren't pushing carriers on price. Larkin notes that UPS does not appear to be concerned with the US Postal Service gaining the ability to lower rates for large-volume users.

On the less-than-truckload front, much of the volume gain at UPS Freight is attributable to the company's ability to cross-sell package and LTL services.

Larkin suggests the company is setting its sights on becoming a fully integrated, global, one-stop shop for transportation and logistics services.

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