Time for a Parcel Merger
The Journal of Commerce, February 1, 2010
By Satish Jindel

Yes, it is time for a merger in the parcel industry. Not of UPS and FedEx, but of Express and Ground services. Today's parcel industry is starkly different from that of 1998, when UPS and FedEx Ground guaranteed the ground parcel service.

Yet, in spite the numerous changes that have eliminated the differences between Express and Ground services, UPS and FedEx have not yet merged these services for fear of revenue dilution. For UPS , while it may not be ready for such major merger, it should divest of two niche domestic express services that have little value in today's parcel industry.

UPS introduced 3-Day Select in 1993. It was introduced as air express service since a portion of the volume has to move in the air network and thus it was also guaranteed for delivery commitment like other air products at that time. After 17 years, 3-Day Select represents less than three percent of UPS ' total parcel revenue and about 2 percent of average daily volume.

Similarly, UPS introduced 2nd Day Air AM express service in 1997 and after 13 years, it represents less than one percent of UPS ' total revenue and even smaller percentage of average daily volume.

Still, UPS continues to offer the 3-Day Select and 2nd Day Air AM as part of its portfolio of parcel services even though it does not promote the two services via television or print media. Many focus groups show the lack of awareness of these two services among parcel shippers.

Could it be that UPS is keeping the two services for their role in the future merger of express and ground parcel service, or just milking them for the volume that flows through into these two services through oversight by customers. However, if it is for the later reason, shippers are less likely to use such premium services by oversight now or in the future.

There are numerous reasons for UPS to divest these two services irrespective of the timing for the merger of express and ground services. When the 3-Day Select Service was introduced in 1993, the parcel industry was very different. At that time, UPS competed with RPS in the ground parcel segment and with FedEx and Airborne in the overnight and second day air express segment. At that time, the bundling approach to services and pricing was either non-existent or in infancy stages.

Furthermore, in 1993, Ground Service transit time at both UPS and RPS was 4 to 6 days for longer distances (zones 6 through 8). At that time, the Ground Service was not guaranteed. At that time, shippers did not have availability of software applications designed to optimize the selection of the most appropriate services of the same carrier or across multiple parcel carriers.

Similarly, in 1997, when UPS introduced the 2nd Day Air AM service, the document business was still growing. At that time, shippers also lacked visibility to normal delivery times for 2nd Day Air packages thus may have paid a premium for morning deliveries with 2nd Day Air AM service. In 1997, the 2nd Day Air AM was introduced for 12 noon commitment. Even with a change to an earlier commitment time of 10:30 am in 2006, the volume for this service did not increase and is still below one percent of total domestic parcel volume.

In 2010, there are only two private carriers in the parcel segment. Now, both UPS and FedEx offer all services - overnight Express, deferred Express and Ground. The document business has now shrunk due to electronic communication. Now, the bundling of services and prices is fully deployed across parcel services and expanded to LTL freight service. Now, Ground Service transit times are much faster with both UPS and FedEx Ground having shortened transit time in over 50 percent of all domestic lanes. Many 3-day lanes now offer 2-day transit times and many 4 day lanes have been made faster with 3-day transit times.

Now, the Ground Service is guaranteed and thus a very attractive substitute for 3-Day Select volume moving in zones 6 or less (or under 1,000 miles). Now, a large number of parcel shippers utilize some type of software application that practically eliminates the opportunity to select these two services by error. With deployment of such software by more shippers, the volumes for these two services will decline further.

Now, with the gap between fuel surcharge and address correction between air and ground services reduced (indication of a potential merger of express and ground services), there is less opportunity for UPS to gain higher margins for this service. While 2nd Day Air AM base rates still have a premium of about 16 percent over the 2nd Day Air rates, the higher discount for 2nd Day Air AM reduces the net premium to single digit.

An internal analysis that accounts for the cost associated with marketing, sales, operation and technology support required to maintain the 3-Day Select and 2 nd Day Air AM services will show that the total cost to UPS is considerably greater than the incremental revenue generated by the extremely low volume for the two services.

So why might UPS maintain these two services? Maybe the continuation indicates that the merger of Express and Ground services is on the horizon and the merged parcel service may include some attributes of these two services. Or, it could be that UPS has realized the need to divest the two services and may do so this year.

Satish Jindel is President of SJ Consulting Group, Inc. with offices in Pennsylvania and India