Boxing in Express: Trends analysis

Express Boxed In

Documents were the foundation of the express industry, but what happens when your customers would rather click than ship?

By Paul Page

The future has arrived at the air express industry and it's come packaged in a box. In sorting hubs around the United States, the express operators that built businesses by getting premium prices to ship letters and documents overnight in standardized envelopes are seeing growth in that lucrative trade crumble under the weight of electronic communications. In a world becoming accustomed to the instant transfer of material anywhere, overnight delivery doesn't look so fast anymore and the express carriers are adjusting in ways that promise to have an impact across a world of companies that delivery goods by air.

The shift has become evident in trends within the traffic numbers for the world's major express carriers, trends that go beyond the stagnant shipping volumes the carriers have reported in a weakening global economy since last year. More significantly, the trends are evident in decisions on aircraft and other operating choices the carriers are making and in the wider range of delivery services that are pushing the carriers into new markets.

FedEx Express, the world's largest air express carrier, has seen the average weight of its shipments grow 30 percent in the last five years, from six pounds to 7.8 pounds, partly because of increased emphasis on parcel traffic but also because the overnight envelope traffic has fallen off sharply from the double-digit growth rates of the early 1990s. What used to be FedEx's core, signature service has declined in the past two consecutive quarters as the American economy has staggered. Overnight envelope traffic was down 1.7 percent in its second fiscal quarter and then down 2 percent in the three months ending Feb. 28, 2001. That business made up 13 percent of FedEx Ex-press revenue in the first quarter of 1999, but that was down to 11.5 percent by the second fiscal quarter of 2001.

"We are not a document company," FedEx Chairman Frederick Smith said in announcing the carrier's order for Airbus superjumbo A380 freighters in February. "We are a company that carries boxes."

Other carriers are reporting similar shifts. "We're seeing a decline in our international document business and that business is central to our portfolio," said Stephen Waller, an executive vice president at DHL Airways, the American arm of DHL Worldwide Express. "We thought we would see the impact of fax in the 1980s, but that never really happened. We were still growing that document business at 10 percent a year. But in the last couple of years, we've seen a hit to that and seen modest declines in the document business that we believe has gone to e-mail and e-mail attachments.

"It has not been a revolution in terms of sweeping aside the express industry at all, but it has certainly blunted our growth," said Waller.

Industry analysts say it's a trend the carriers should get used to.

The Colography Group, a Georgia-based research and consulting firm that closely tracks the express industry, projects that package traffic will grow far ahead of letter and envelope traffic this year by just about every measure.

Colography forecasts overnight package shipments advancing 5.6 percent this year in the United States, adding 9.3 per-cent in revenue for carriers, against 4.1 percent growth for letters and envelopes in revenue and shipments.

The picture is similar in the inter-national arena, where the integrated express carriers are finding them-selves in ever-closer competition with network forwarders. Colography says the average weight of air export shipments handled by integrated carriers grew 5.5 percent in 1999, the most recent full year for which figures were available. Colography says document and parcel traffic grew at just about the same rate in 1999 – 4 percent for documents and 3.9 percent for pack-ages up to 70 pounds.

Why the shift? The answer isn't in the mail, but in the e-mail. Huge numbers of the legal documents, intra-company memos, magazine photographs, the raw materials from advertising agencies and myriad other materials that have long filled the standardized envelopes of the express carriers are now moving by click rather than ship.

"Those secretaries who got used to putting things in express envelopes are now e-mailing," said Satish Jindel, a principal in SJ Consulting, a specialist in the parcel industry.

"Clearly people are using e-mail to send letters and reports," said DHL's Waller. "Legal documents are going back and forth via e-mail. All of this is traffic that the express industry used to carry.

"It is a foundation product for the network. We need to focus in this industry on that business that still sends and needs to send their type of product express – final contracts, for instance, and certain types of documents that are complex and cannot be transferred easily electronically," Waller said.

But Brian Clancy, a principal of the MergeGlobal cargo consulting firm, says the industry is seeing the early stages of a trend that will likely continue for several years before it stabilizes. "A lot of documents for legal reasons still need to be delivered as hard copies. And for those that carry a lot of data, it's still not as efficient to send them via the Internet," he says. "It may take 10 to 15 years for new systems to be de-signed and implemented for commonality. Once that infrastructure is in place and people are comfort-able enough using it, you'll see even more erosion."

Still, analysts caution that envelope business remains enormous and that its diminishing share of the ex- press portfolio is being balanced against growing importance of boxes. "The absolute number of documents moving in air service is not declining but it is generally down from a 12 to 15 percent growth rate to about 3 percent, so it is tracking with the economy," said Theodore Scherck, president of Colography.

"You have to keep in mind that it is growing at the lower rate off a far, far larger base. But there is no question that intra-company, intra-office traffic is now moving electronically."

"At the same time, the package business is exploding. The sort of traffic that would take a week, be-come part of a larger consolidation and held at a regional distribution center is now more often going from the point of production to the point of consumption. Packages will continue to grow faster than either freight or envelopes and short-haul will grow more rapidly than inter-mediate- or long-haul," he says.

Express operators have reacted to the shift in myriad ways, and are clearly trying to move more boxes into their systems. That is one reason behind the drive for partnerships with postal authorities around the world.

The huge FedEx agreement with the U.S. Postal Service, given a go-ahead by a judge in Washington last month, will bring postal envelopes and parcels onto FedEx planes while giving the express carrier a wider audience through its drop boxes placed at post offices around the country. More boxes has meant gradual changes in infrastructure in the air and on the ground, and not at the carriers' operations alone. Airports and a host of other businesses are adjusting to the shifting patterns of shipping.

"Companies no longer make major shipments from warehouses around the country," said Frank Chambers, president and chief executive of Aviation Facilities Co., a Virginia- based developer of airport car- go facilities. "They are positioning more of their business at major air-ports and shipping out of there in smaller increments. What we are seeing is a move from a freight through-put facility to a large box-type facility to handle inventory." FedEx and Airborne Express, the No. 3 express carrier in the United States, are in the midst of a rapid escalation of ground service as they search for more boxes. The shift was evident in FedEx's purchase a few years ago of trucker Caliber and its RPS parcel subsidiary and in its re-cent rapid additions to less-than-truckload service as it moves to bolster ground-based services.

It has also meant a dramatic difference in the air, most evident in FedEx's purchase of those A380s. "Envelopes are not the reason you buy A380s," noted Alan B. Graf Jr., chief financial officer at the Memphis, Tenn.-based carrier.

The carrier ordered 10 of the Air- bus superjumbos for delivery later in the decade, but the infrastructure changes go far beyond the few inter-national routes that may see those aircraft. FedEx is gradually replacing narrowbody 727-200s with larger air-craft throughout the United States, generally opting for converted A310s that have far greater freight space within their widebody frames. United Parcel Service has added 767s and A300s to its fleet, Airborne is moving toward 767s and DHL and TNT have moved toward A300s, filling their air with widebodies where lower-volume narrowbody freighters had once flown. The wider aircraft are more suitable to boxes, but that also has far-reaching implications as the express carriers try to use that wider capacity.

"The density of documents and mail is much higher than that of packages and freight," said Waller. "That has caused us and the entire industry to look more at widebodies rather than narrowbodies. … As we go more to widebody freighters, yes, we compete more with forwarders at the premium end of the air freight product. But forwarders are also some of our best customers." In the American domestic arena, many forwarders are pushing their business up the weight ladder as the integrated carriers look for heavier shipments.

"Yes, we are looking for more freight and fewer boxes," said Brandon Fried, chief operating officer at Adcom Express, a forwarder that has long gone after box traffic from industrial shippers. "But that is not necessarily a bad thing at all. There is more revenue in a freight shipment and it means less handling and a better return with fewer stops for our drivers at the pickup and the delivery end."

The larger aircraft also offer forwarders more wholesale all-cargo space, but the express operators are also moving to fill that space with their own traffic by pushing shippers to change the way they ship their hard goods. Services such as the UPS Hundredweight program, FedEx Express-Saver Freight and others seek to split larger consolidations and break them up into smaller shipments, pushing traffic out a few boxes at a time.

DHL has built a package service, WPX, and its premium air freight service, World Freight. WPX, says Waller, is twice as large as the document business in DHL's system. With the freight service, says Waller, "We're not trying to compete with all the forwarders. A lot of their business is based on consolidation and we are simply not in that market. We want single customer loads, moving door to door, at the premium end of the market that values speed."

Industry experts believe that traditional forwarders will come under in-creasing pressure from the integrators as those express operators look to get shippers to break up consolidations and ship more often in smaller increments, a trend forwarders and express carriers say they are already seeing in the U.S. economy.

With the brunt of their market in heavy freight, freight forwarders face "serious challenges," said Scherck. Domestically, he said, "They have to get into the short-haul regional market which is where all the action is."

The international picture is different, with forwarders still carrying the largest share of the business. But Scherck notes that FedEx Express held 35 percent of the market for U.S. air export shipments in 1999, and the integrated carriers are clearly pushing their international business.

Clancy estimates that only 15 per-cent of international air freight traffic is so-called "ugly freight" – the industrial equipment that could never be pushed easily through a standardized express network. "The rest is a collection of smaller packages.

It's a question of lot size: do you carry one box of Bennetton shirts to an outlet or a skid of 500 boxes? What you carry is a function of where you are in the distribution channel. As the architecture of distribution shifts, so do lot sizes. As they decline, the large forwarder is no longer competitive. The forwarder's system is not made for refined sorts and so his cost advantage over the express carrier goes away."

Forwarders may not have as much to worry about as the United States' No. 3 express carrier, Air-borne. The Seattle-based carrier gets its freighters without cargo doors and loads its small parcel and envelopes through the passenger doors in special-built containers. There are big savings in conversion costs, but the carrier has limited flexibility to cope with larger shipments.

The average weight of Airborne's shipments hasn't changed much over the years, with the 4.5 pounds it reported in the fourth quarter of 2000 up about 5 percent over the year before but still in line with historic norms. Airborne's overnight shipment count went into decline in the second half of last year, however, and that core business has been stagnant for about two years.

"Airborne has been hurt the most," said Clancy. "The trouble is, even if they had the infrastructure, they don't have the business."

Airborne has been responding with a ground service it is launching this spring. It has also sought to drive more box traffic with its air-borne@home service offered in partnership with the Postal Service.