Goliath VS. Goliath – US air-express market

The battle for the lucrative American air-express market is attracting giant foreign competitors with deep pockets and government backing. From recent news accounts, you might think the only battle in the air-express marketplace today is the one that pits United Parcel Service and FedEx Corp. against German public-private giant Deutsche Post AG. Generally bitter rivals, FedEx and UPS have found themselves unlikely collaborators in the fight to keep Deutsche Post’s subsidiary DHL Airways Inc. of Redwood City, Calif., from competing with them (on the grounds that Deutsche Post’s ownership of DHL violates U.S. regulations). But Deutsche Post is not the only threat: The battle for market share in the highly desirable North American air-express market is attracting more and more potential competitors with European roots. Both Britain’s Royal Mail and Air France have expressed interest in entering the U.S. market. Royal Mail already provides express delivery of documents in North America through its New York City-based subsidiary Citipost Group, a document/publications delivery company with operations in Europe, North America, and the Pacific Rim. Air France and Delta Airlines in March received approval from the U.S. Justice Department’s antitrust division for a joint venture that would combine their aircargo operations. Yet the British and French operations are small potatoes compared with the newest entrant in the domestic U.S. market. That 800-pound gorilla in the fight for North American market share is the TNT Post Group of Amsterdam, the leading air-express carrier in Europe. It’s entering the domestic market through a subsidiary, TNT International Express USA of Garden City, N.Y., with two new services: an intra-U.S. service targeting key metropolitan areas – including Baltimore, Boston, Houston, Los Angeles, Miami, Philadelphia, San Francisco, and Washington, D.C. – and a one-rate express letter service with no commodity or weight restrictions to and from those cities. To get an idea of the new entrant’s size, consider that the company’s express business distributes 3.2 million time-sensitive documents, parcels, and freight shipments each week through its network of 800 hubs and depots. Logistics consultant John Mariotti, founder and CEO of The Enterprise Group in Knoxville, Tenn., and author of several books including The Power of Partnerships, says FedEx and UPS will be hard-pressed to compete against their European rivals, which don’t share the U.S. parcel carriers’ obligations to keep investors happy. “It is difficult for private-sector companies that must make a return on assets/equity that is acceptable for shareholders, to compete with public-sector companies that are subsidized by governments,” he points out. “That is the real central issue.” Although FedEx and UPS are relatively small players in the European express market, where TNT is king and DHL is the largest international express carrier, the two American players dominate the U.S. market and are demonstrating that they are ready and willing to protect their turf. In fact, the two carriers have already complained to the U.S. Department of Transportation (DOT) that Deutsche Post is hiding behind its complicated ownership stake in DHL Airways so it can illegally finance its expansion into the American market with the profits of its monopoly mail operation. The Federal Republic of Germany owns 75 percent of Deutsche Post World Net, which in turn owns 51 percent of DHL International, as a result of a recent acquisition. DHL International has a minority stake in DHL Airways Inc. of Redwood City, Calif., which has been licensed by DOT as an air carrier for more than 20 years. Both companies use the Worldwide Express trade name. FedEx’s filing contends that Deutsche Post’s current stake in DHL Airways and its associated company, DHL International, means that DHL Airways no longer fits the requirement that prohibits more than 25-percent foreign ownership of a U.S.-registered air carrier. FedEx has asked the DOT to hold public hearings on the matter. In a separate filing, UPS and FedEx have asked that a U.S. freight forwarding license issued to DHL be revoked. They claim Deutsche Post is illegally using proceeds from its postal monopoly in Germany to gain access to the U.S. market by hiding behind the DHL Worldwide Express brand. They charge that Deutsche Post and DHL International control the U.S. affiliate. Not surprisingly, DHL dismisses these charges. In its response to the DOT, the carrier says it has been legally licensed to operate in the United States in compliance with ownership requirements. DHL’s statement contends that the only smokescreen being created is by FedEx and UPS, using the foreign-ownership charge to keep DHL Airways from competing with them. In the meantime, American labor has also weighed in with its concerns. Both the International Brotherhood of Teamsters and the Transportation Trades Department (TTD) of the AFL-CIO have appealed to the U.S. DOT, charging that the granting of the DHL Airways license violates the department’s regulation guaranteeing competition free from foreign-government intervention. “The TTD is concerned that DHL might use some of the monopolistic powers of Deutsche Post AG in Germany to undercut prices in the United States,” says Ram Ganeshan, a professor of logistics at the College of William and Mary in Williamsburg, Va., who notes that a first-class stamp costs twice as much in Germany as it does in the United States. “On the other hand, DHL Airways contends that it is a licensed U.S. carrier, with at least 75 percent of its stockholders’ voting rights controlled by Americans, satisfying DOT regulations. Although the resolution of this conflict lies ultimately with the DOT, it shows the delicate balance between expansion, customer service, regulatory restrictions, and competition.” In any event, the ownership issue may become moot. The European Commission last month ordered Deutsche Post to spin off its parcel business into a separate division. The new entity will be required to purchase services from its parent at market rates to prevent the postal monopoly from subsidizing the parcel operation. Unfortunately for FedEx and UPS, these battles come at a time when the industry is already under stress. “From an industry perspective, the parcel/express segment of the logistics industry has undergone enormous change in the last five years,” observes Ganeshan. With the e-tail revolution, the near-instantaneous ability to source and purchase goods online has created enormous demand on carriers to create faster, cheaper, and more reliable service, he says. It also has pushed parcel express carriers to create larger networks (FedEx, for example, recently expanded its system by acquiring LTL carrier American Freightways of Harrison, Ark.) as well as develop a full range of fulfillment services for traditional shippers, e-tailers, and business-to-business marketplaces. Can the U.S. players weather the storm? UPS has the size and scale to put up a good fight, says Mariotti. Similarly, FedEx’s good reputation, capital, and infrastructure make it a formidable contender, he adds. But subsidized competition from a company like DHL spells trouble because it could create disruptive pricing as the European-based carrier muscles its way into the U.S. market. This move, says Mariotti, could force UPS and FedEx “to either relinquish footholds in lucrative markets or with key customers or actually reduce the industry’s overall profit-return structure.” In other words, should they successfully fend off the foreign giants, FedEx and UPS could find that their victory has come at the expense of their profit margins. “The concept of the annoying ‘ankle-biters’ – companies that compete by offering low-ball prices – is one common to many industries,” Mariotti continues. “The common hope is that these kinds of competitors can only take a limited amount of business at those ‘lower’ prices. This is not so in the case of a large, government-subsidized competit
or with nearly equal operating costs. This is a very (troubling) scenario.” Although the prospect of lower prices may be music to shippers’ ears, the tune will eventually deteriorate into discord, Mariotti predicts. Lower prices, he warns, could eventually translate into lower-quality service. ISSN 1098-7355; Issue 4; Volume 40; Page 49 Copyright 2001 Cahners Business Information © 2001 Resp. DB Svcs. All rts. reserv.
$$LOGISTICS MANAGEMENT & DISTRIBUTION REPORT, 01st April 2001