US Parcel Business: Competition is a Good Thing.

Jerry Hempstead of Hempstead Consulting is a great friend and former colleague of mine. After 32 years in the express and parcel business in the United States, Jerry "retired" a couple of years ago only to become one exceptionally busy guy. Jerry's expert knowledge of the parcel business has led him to some very interesting consulting engagements in China and the United States.

The article below is an Opinion/Editorial reflecting Jerry's personal insights. Jerry can be reached at gmhempstead@aol.com

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Every year I read magazine and on-line articles on parcel carrier tariff and accessorial increases with great interest. These articles always contain at least some acrimony about pricing changes.  Presentations by parcel consultants at conferences are usually no better. 

In an unregulated market, carriers have the right to charge whatever they want as long as they don’t collude on pricing decisions or pricing strategy. The only governors on pricing are competition and market conditions. 

How the Dance is Done.

Normally annual rate increases are initiated by FedEx. FedEx announces their general rate increase and rules changes for air shipments then state that their ground increase will be announced shortly. UPS usually matches the FedEx air increase and makes an announcement on the UPS general increase for ground. FedEx then matches the UPS ground increase. Historically DHL matches both increases at almost the same percentage levels. That’s how the dance is done on the carrier side.

In my years of parcel express experience, I never called on a customer that paid full tariff (book) rates. Everybody had a discount of one sort or another. Beginning in 1980 shippers could negotiate anything they wanted with the air carriers. There were so many players back then that all kinds of discounting, refunding, schemes, plans and incentives were invented. 

That was then. This is Now.(2008)

Recent conjecture in the media has been that DHL may reconfigure or possibly reduce its express operation in the United States.  This idea came from the extrapolated "analysis" of two analyst reports.  Unfortunately neither report painted a complete picture relative to the value of DHL Express's US presence to the whole of Deutsche Post World Net. 

DHL consists of many parts, most of which are profitable.  Deutsche Post World Nets (DPWN) contract logistics and freight forwarding businesses are very profitable.  DHL Express is a moneymaker outside the US.   So while some analysts get excited about the US market, DPWN is a many tentacled beast.  DHL’s various business divisions are highly interlinked. Removal of DHL Express from the US market would substantially hurt the other (profitable) business units. Relative to DHL’s US market position, consider that UPS lost money for many years in Europe and FedEx even withdrew from Europe at one point.

DHL continues to make strong service investments and alignments in the US and globally.   Deutsche Posts new JV all cargo airline with Lufthansa and recent investments in Polar Air show that.   DHL isn't going anywhere.

Looking at how competitive pricing is arrived at, DHL serves a substantial role in the US market as a mitigating competitive factor in containing rate increases for the parcel shipping public. Without a third player, FedEx and UPS control the game. Shippers will long for the rational rate increases of the past. 

I did a lot of service analysis for shippers in 2007 that were using UPS, FedEx and DHL.

Except for December 2007, which was impacted by weather, there was little statistical difference in the delivery performance of the three carriers when you look at delivering on the correct day. The improvement of DHL’s service was also evidenced in the annual shipper survey done by Morgan Stanley and Parcel Magazine. 

Your world will not end if you only support FedEx or UPS; but your discounts might end if you don’t support all three players in the US market. The shipping community needs to support all three parcel carriers in order to have the market leverage that a third viable carrier provides.

Consider the Bigger Picture: World Market Forces

Maersk recently announced a 3000 person layoff and divisional realignment globally. They are the world’s biggest shipping line.  Lufthansa recently announced they will be hiring 3000 people because of the growth of international air passenger traffic.   Transportation carriers follow the freight.  If a shipper can't sell it, a carrier can't ship it.    In weak economic times, carriers reconfigure their networks. 

A Word to the Wise

In my many years in the parcel business, I’ve worked hard to get the best deal for both my customer and my company. Competition was always the driving factor that forced me to get the best deal. Removing competition from the playing field while all carriers are under pressure due to fuel costs and currency fluctuations will significantly increase rates in coming months.

Trust me. Don’t leave FedEx and UPS without a third competitor. Regardless of conjecture of market analysts, DHL is part of a much larger entity in Deutsche Post that’s simply not going to leave the US market.

Jerry

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Comments

[Eric]

Jim Casey! Respects! Welcome back from the dead.

The FDX purchase of DHL might be plausible if it weren't for Fred Smiths terminal allergy to the Teamsters.

[Jim Casey]

You are wrong about this purchase. #1 You are nuts if you think close to a BILLION dollars is an accepted amount of a loss to keep a foot print in the US. NO FOOTPRINT IS WORTH A BILLION DOLLARS THE PROFITS IN THE ENTIRE THINLY PRICED MARKET ARE NOT PRESENT !

TRUST ME READERS, THE PURCHASE OF DHL BY FDX WILL HAPPEN IN 2008.

[Eric]

Dr. Poulsen, greetings. I was thinking of you today. As for your answer, beats hell out of me.

And if I did know the answer I couldn't post it here!

[Hassan Al Arabi]

DPWN does not publish detailed results for their different business units but how will alleged losses of USD 938 million for DHL Express USA affect the continued "investment" appetite of DPWN in the North America express segment ? It is now the third management team since the Airborne deal was completed.

[nate]

Regarding the carrier rate increases. http://www.shipwire.com team has been watching this for years as well. We typically deal with growing Web merchants and help them optomize their supply chain by plugging their Web store into our Growing Warehouse Network.

We get a lot of questions about the rate increases and the power of shipping discounts.

So much so that we wrote a blog posting dymystifying shipping discounts and trying to show customers what the power of multiple forward warehousing points can do.

I'm posting it hear because we're fans of your blog and would welcome your comments.

(NOTE: Nate, thanks for your comment, but you are right on the edge of spam sir. Eric.)

[Eric]

I found it ironic that the FT article (as carried by Reuters) quoted an unnamed "manager" regarding this discussion.

I'd take everything you read on this whole subject with a 14 lb grain of salt.

Next thing you know it will get reported that DHL is buying FedEx. I actually heard that one from a customer the other day.

If this wasn't irritating to me, it would be funny.

[Bill]

Report: FedEx in talks for DHL purchase

FedEx Corp. is attempting to buy the U.S. express division of rival DHL from its parent Deutsche Post World Net, according to a Reuters story that cites German newspaper Financial Times Deutschland.

The newspaper said negotiations are underway and the firm wants to sell the DHL division by May at the latest. However, a Deutsche Post spokesman called the news speculation and wouldn't comment to the paper.

[Jerry Hempstead]

I want to add some comment on todays RUMOR that FedEx is going to buy DHL USA.

I grew up in New York and am a cynic and everything to me is a conspiracy. Ergo: let me say that I don't think the Reuters story as written can be true.

DHL USA has thousands of Teamster Union drivers. FedEx has no unions, save for their pilots which have their own unaligned union. The Fed drivers are non union. Fed has for years made very carefully crafted moves to keep from being organized. The moment they get a DHL Teamster barn in their book of buisines is the day they choke on the work rules and pay issues they have never had to deal with.

That said I believe that from a financial point of view that it would be prudent for Deutsche Post to sit down with TNT, UPS, FedEx and the USPS to explore synergies and opportunities and marriages that might make sense to all parties.

All the deals that can be done in the transport biz have not yet all been done. Everything is on the table when you are managing shareholder money. Nothing is sacred.
So could there be some sort of conversation going on between fedEx and DP about DHL....I would be surprised if there has not been, actually...what may be going on though and what has been reported as Rumor may be very different indeed.

[Richard Palarea, COO]

Finally, some balance to the noise out there. While Jerry is a competitor of mine, I have no lack of complete respect for his wisdom and expertise on all matters of this industry. Jerry - once again, you're not afraid to tell it like it is.

To read the junk that gets posted daily on the Parcel Magazine forum would have you think that DHL US ceased operations years ago. Just about everyone (with the exception of DHL managers and reps that occassionally post a rebuttal) will give unsupported feedback ranging from DHL's sub-standard service level to their inability to compete in any area with FDX and UPS in a real-world customer's office or warehouse environment.

Our analysis of 2007 shows what Jerry's numbers and the shipper surveys revealed; there is almost complete service level pairity between all three carriers. Anyone evaluating the carriers needs to get beyond the noise and do the research...talk to consultants, analysts and customers and get the real story. Just in our microcosm, we have 30% of our clients using DHL in a real, daily and meaningful way and I can say with certainty that any issues they experience are no different or more frequent than our FedEx or UPS clients.

My disclaimer is that PA & Associates has been an independent, third party to negotiations for 17 years and acts as a fiduciary to our client and an agent in the outsourced negotiation of carrier agreements. My comments should not be slanted toward or viewed as favorable for any one of the three carriers. That said, someone needed to speak out. I'm glad it was Jerry because he can do it with credibility and meaningful data backing his viewpoints.