It's Not the Economy!
Traffic World, October 28, 2004
By Satish Jindel

Recently, FedEx Corp. released its earnings results for its first fiscal quarter. The results were spectacular in express parcel, ground parcel and freight operating units, particularly when compared to the results of last several quarters. Yet many analysts are focused on the relatively stagnant volume in the domestic United States market for the express unit. Elaborate explanations by FedEx about the structural changes in domestic shipping have not registered with many who watch this industry.

Unlike shippers, Wall Street expects the express market to perform as it did in the past. Many believe that with the uptick in economy, shippers will use more expensive express service to get shipments to the market faster.

But does weakness in the domestic express market reveal some underlying weakness in the economy?

Not at all. This thinking fails to recognize the structural changes that have occurred in the domestic parcel and freight market in last seven years. Structural changes in the carriers’ network and in shippers’ operation suggest that economic growth alone will not convert ground shipments into express services.

There are many reasons for this change. First, in recent years, parcel carriers have made impressive strides in reducing the transit time in their ground service. Parcels with two days transit time in the past now have one-day commitment, and parcels with three days transit time now have two days commitment. As a result, many parcels that may have gone through express air or deferred air services are now shipped via ground service and still getting equal or faster transit time.

Using its bundled portfolio of express, ground and freight services, FedEx is proactively balancing shipments between those that truly need to move in express network and those that are better handled in the ground network, enhancing value for its customers.

Second, since 1998, the parcel carriers have had money back guarantees on ground service. This has had a significant impact on shippers’ choices between express and ground. Before, many shippers used express or deferred services not for speed of delivery but for expectation of higher level of service and predictability of delivery.

Third, the widespread use of Internet and shipping optimization software has given shippers the ability to measure the on-time service levels for their own shipments. As a result, shippers are finding that in many markets ground service is as good as or better than express since express parcels in shorter lanes may travel on the same trucks and are processed at the same hubs as the ground parcels.

Fourth, the LTL industry has significantly enhanced its service during this period. Besides adding a money back guarantee as part of standard service in 2003, regional LTL carriers have extended their reach for overnight service to 800 miles and for two days to 1,400 miles. This has converted shipments from express service to trucks. The growth in shipments at Forward Air, a trucker focused on serving air freight providers, reflects this trend in the domestic air freight industry.

Fifth, numerous changes in shippers’ operations also have had much impact on this permanent shift from express to ground. Deployment of warehouse management systems at a more rapid pace, the impact of September 11 on security and more powerful information technology have made it easier for many shippers to navigate the maze of express and ground services. These developments are permanent and will continue to shift express parcel and freight shipments to ground services.

And lastly, the overlapping services and transit times between express, deferred and ground still exist. As a result there are still millions of parcels shipped express at a higher price due to lack of urgency or initiative on the part of many shippers. The new competitive pressures among the giants in this industry will further convert more express shipments to ground service. Moreover, as the prices of some products decline - witness the enormous decline in the prices for personal computers - shippers and buyers are unable to support the higher cost of express service.

Responding to these market changes, FedEx and its competitors are balancing shipments between various operations to provide customers with the best solution at the best price. Life would be easier for the carriers if it were just the economy.

Satish Jindel is president of SJ Consulting Group, based in Sewickley, Pa. SJC does consulting work for FedEx and other large and small transportation companies.