Parcel Industry in High Gear
Traffic World, March 26, 2001
By Satish Jindel

The parcel industry today is very different from the decades past. It took birth with the founding of United Parcel Service in 1908 and UPS quietly ruled the industry for eight decades. In fact, it did not catch attention of the investment community and corporate executives until 1985 when Roadway Package System, Inc. established its foothold as the first successful competitor to UPS.

While there had been previous attempts to compete against UPS, the failures created an aura that UPS was invincible. With all odds against its ability to succeed, RPS became the first private ground parcel carrier to provide a real alternative with its new value added offerings. As a result, UPS, the tightest ship in the shipping business changed course. The changes introduced by RPS to the ground parcel market have had a greater impact on UPS than any other single event. 

In its early years, RPS was information based and introduced several new features like itemized billing, tracking and tracking, collect program, and incentive pricing. None of these services were available from UPS at that time. The relationship between RPS and the shippers was mutually beneficial.

While the shippers benefited from new features and incentive pricing not available from UPS, RPS was able to stay the course even with inferior on-time service due to shippers' willingness to help the new carrier become successful so as to gain another alternative to UPS. Moreover, by supporting RPS during these startup months, the shippers ultimately benefited to a greater extent through a more responsive and customer friendly UPS.

If not for RPS entry, large shippers today would be paying 2 to 3 times more in shipping charges and still lack itemized billing, collect and call tag. Even though UPS is unlikely to admit, it has benefited from the changes that RPS brought into the ground parcel market. When RPS exposed cross subsidizes between short haul and long haul pricing, it became a catalyst for UPS to modify the entire pricing structure. These changes may have also influenced the introduction of zoned pricing in express market, which gave operational and cost advantage to UPS over its major express competitor. As a result of these changes pushed upon UPS during the last fifteen years, UPS is a much larger and a more profitable company than it was prior to RPS entry into its core parcel delivery business.

While RPS start up introduced more competition in the ground parcel market, the express industry became more competitive for different reasons. When FedEx introduced the overnight express service to the US domestic market in 1973, a letter rate was $25 for overnight delivery, or about twice the current rate, and four times if adjusted for inflation. The competitive forces that contributed to reduction in the express market were very different. While UPS expansion of its express services in late 1980s added to pricing pressures in the industry, the presence of a third low cost express carrier, Airborne Express created a greater competitive environment. First, Airborne focused on large business to business customers much like RPS to build the density and achieve lower cost operation. Second, when FedEx and UPS changed the overnight delivery commitment time to 10:30 a.m., Airborne retained its value based 12 noon service, thus providing shippers a reliable overnight service that met their next morning needs without the extra cost with the 10:30 a.m. delivery.

If shippers evaluate the value proposition of the 10:30 am overnight service, they will find that only 40% of all zip codes qualify for 10:30 delivery commitment. Moreover, of those parcels delivered by 10:30, many are held in the mailroom or remain unopened till afternoon or another day. While Airborne may not have influenced introduction of new services, it did provide an alternative to FedEx and UPS for overnight service and a value proposition that has saved its customers hundreds of million of dollars. And, even those shippers not using Airborne services, they are benefiting from more attractive prices and new services from FedEx and UPS.

Now, as Airborne introduces ground parcel service this month, the shippers will have a third carrier to evaluate and consider for their ground parcel needs. While RPS was instrumental in bringing many changes in the ground parcel market in its early years, its impact on the business-to-business parcel shipping competitive environment is not as noticeable now. But now, RPS (as FedEx Ground) is bringing similar changes in the business-to-residence market. Its new Home Delivery Service introduced last March created a third delivery carrier (in addition to UPS and USPS) for business to residence shipping with new features not available from UPS, such as Saturday delivery and guaranteed delivery commitment.

Similarly, starting in April, business-to-business ground parcel shippers will have a third alternative just as they have three carriers for domestic express services and many more carriers for heavy freight and truckload delivery services. With Airborne entry, the business-to-business parcel shippers may get further improvements in the ground service such as value based ground transit times.

The changes that Airborne's entry and DHL's intentions to expand its U.S. domestic operations will bring for the ground parcel market will not be fully felt for several months. However, one thing is certain -- that the level of impact will be determined by the degree of support offered by shippers during the early months of introduction to the new competitors.

The barriers to entry in this industry are already significant and increasing every year with the need for a capital intensive nationwide network and shipping technology. If these carriers execute their plans effectively and receive shipper support like RPS did in the 1980s, they can built enough density and experience with their new services to make the entire industry more dynamic, competitive, customer friendly and innovative.

Jindel is a principal in SJ Consulting Group, Inc. Pittsburgh