If the price of what you've been buying is rising to the point where you can no longer afford it, you naturally look for a suitable replacement. If you can't find a replacement, you're stuck. Right?
Not anymore. Logistics professionals who need to move a high volume of small but time-definite shipments were once captives of expedited air freight service providers. But they're captives no more—at least not in the shorter-haul lanes. The burgeoning tim e-definite service sector has expanded to include a host of ground-based service providers. While these ground-based expedited carriers can't serve all needs, they have significantly improved their performance and expanded their coverage areas. The result: Many, many shipments that once had to travel by air are now remaining solidly on the ground.
For shippers, it's a wonderful thing. Their deadlines are being met. Their budgets are under control, and the increasing cost of expedited air has had only a limited impact on their bottom line.
This, of course, didn't happen overnight. Many inter-related aspects of the logistics business had to move into alignment to get to this point. But largely through the use of technology, the expedited transport industry has developed into an agile, customer-driven industry whose innovation and execution have permanently improved the way we live and do business. If they want to sustain the momentum, however, carriers must keep in mind four trends whose influence will continue to shape the market: the rising dominance of the t ransportation buyer, the decline in average shipment weight, the shift from mode-specific to time-based shipping, and the shortening of the average length of haul.
A buyer's market? It depends
Executives in the transportation industry have long lamented pricing they consider irrationally low given the quality and value of services rendered. That could change.
The empirical evidence, based on the Atlanta-based consultant The Colography Group's analysis of four primary categories of traffic—domestic air, ground parcel, air export and less-than-truckload (LTL)— tells us that, on balance, strong end-user demand will be met by firmer pricing on the supply side. Providers will obtain a reasonable return on their pricing initiatives as long as they're positioned to respond to their customers' dynamic distribution needs and can reliably execute on strictly established delivery requirements.
The pricing environment does vary by mode, based on analysis of industry yield per pound, which is the most accurate measure of pricing trends in the marketplace. Air freight pricing, for example, has grown slowly. From 1990 to 2002, the average yield on a pound of domestic air freight rose from $1.40 to $1.72, which translates to a compound annual growth rate of 1.7 percent. (See Exhibit 1.)
For this same time period, inflation compounded at 2.8 percent per year In addition, the growth in yield in recent years has come through fuel surcharges, which are essentially a direct cost pass through. In other words, domestic air yields have actually declined in constant dollar terms over the past 12 years. This is due in no small part to the increasing sophistication and successful use of information technology by the air freight buyer and the service provider to achieve operating efficiencies.
Projecting from 2003 to 2007, domestic air yields should show a bump from $1.77 to $1.97 per pound. Two factors contributing to that are the distance-based pricing programs adopted by virtually all of the leading U.S. domestic express carriers, raising yields on longer-haul freight, and the migration of short-haul traffic from air to ground, taking much of the lower-priced freight out of the mix.
The picture varies in other modes. Less-than-truckload carriers and air export car riers have had difficulty making gains. Yields per pound for LTL and U.S. air exports remain flat. Furthermore, per-pound yields for LTL will remain flat and air export yields will head downward in the next four years, according to our projections.
But ground parcel yields, which we started tracking in 1992, have shown a healthy percentage gain, with perpound prices rising from 41 cents in 1992 to 58 cents a pound in 2002, a 41-percent increase. The success of those ground carriers in delivering service that rivals air cargo, especially in short zone markets,has enabled a steady rise in prices. And that trend will likely continue: Ground parcel yields will demonstrate steady growth from 60 cents a pound in 2003 to 69 cents a pound in 2007.
Even with those increases, domestic shippers can expect to pay less overall for transportation than they do today. The reasons: the increasing substitution of ground for air in short-haul markets, the growing proportion of shorter haul shipments and the trend toward lighter average shipment weights.
One area that is likely to see significant change is the demand for medium hauls, those between 900 and 1,500 miles. Shipments in that range will be affected by the development of supply chain networks designed to distribute goods on shorter hauls and to move long-haul goods on more direct routings and away from consolidations. This strategy, which we term "disaggregation," is a prime example of the dramatic logistics reconfiguring now under way.
The disaggregation trend has also produced a "barbell" effect on U.S. transportation. At one end of the barbell, a growing percentage of all goods are moving in short lengths of haul, defined as less than 600 miles. At the other end, long-haul LTL services are gaining momentum as businesses opt for cheaper surface alternatives to have their disaggregated goods moved from point to point.Once the goods reach a distribution center near the point of destination, they are shipped out locally via a regional surface carrier.
As a result, rates for long-haul LTL services may escalate as point-to-point shipping increases and frugal shippers seek low-cost alternatives to air freight. But p ricing in the medium-haul LTL market will stagnate—a reflection of that segment's uninspiring prospects.
The incredible shrinking shipment
Shipments are not only moving shorter distances, they're getting smaller as well. After peaking in 1997 at 36.9 pounds, the industrywide average shipment weight for U.S. expedited cargo has been in steady decline, falling to 34.2 pounds in 2002 and projected to drop to 31.6 pounds by 2007. (See Exhibit 2.)
Most of the decline is skewed to the domestic air freight segment, where the weight of the average air shipment fell sharply in 1994 and has been dropping ever since. We expect air shipment weight to decline to 6.5 pounds by 2007, which would be the lowest in all the years we've been tracking these figures.
What's behind this decline? The prevalence of lighter high-tech shipments in the overall product mix and a shift to lighter-weighted plastics and alloys in the manufacturing process play key roles. Most notable, however, is the move to "disaggregation," which will continue to drive the migration to smaller and lighter consignments.
In years past, a company shipping from, say, Atlanta to Los Angeles would ship into a distribution center in Chicago. In Chicago, a distributor would aggregate the company's shipments with others and dispatch them via LTL to Los Angeles.
The creation of new distribution platforms, most notably e-business, has changed the equation. Today, goods ordered online can be sent directly to the consignee and are not subject to aggregation. As a result, shippers and their customers are abandoning their traditional centralized inventory models—which favor consolidations—and are opting for a decentralized infrastructure that pumps out goods with more frequency as individual consignments. The end result is growth in the number of smaller and lighter shipments.
The shifting sands of "time"
Perhaps the most durable and meaningful trend of the last 20 years has been the shift away from mode-specific to time-based shipping. Not only has this trend stood the test of "time," but it has also been the basis for the development and implementation of virtually every major transportation strategy over the last two decades.
More than ever, transport in the United States—and internationally as well—reflects modal neutrality and an emphasis on timedefinite services. What's most crucial is not speed, but reliability. Cost-conscious consignees are willing to trade down the speed of transit times as long as the freight will arrive at pre-determined intervals. How the freight moves has become less important. In our surveys, when we ask shippers to list the most important factor in choosing a carrier, 95 percent put "on-time delivery"at the top of the list.
The shift to modal neutrality, combined with the economic realities of the marketplace and the shrinking of lengths of haul, has benefited ground parcel carriers most. We trace this back to 1998, when UPS introduced a money-back guarantee on all its ground deliveries, which was soon matched by FedEx Ground. By the time Airborne Express (now part of DHL) rolled out its "Ground Delivery Service" in 2001, guaranteed delivery had become the ground parcel industry standard.
All three companies have built well-deserved reputations for delivery precision and reliability. As a result, shippers are gravitating toward these providers and away from traditional LTL services, where the reputation for reliability has not been as sterling. While traffic handled by other modes declined drastically since the economic down turn began in 2000, ground parcel shipments actually rose from 2000 to 2002.
Looking out five years, ground parcel will demonstrate the most robust growth in the transportation industry, cracking the four billion shipment barrier in 2007. Nearly 70 percent of all U.S.-originating traffic will move via ground parcel services by that time.
Shortening the hauls
Today, over two-thirds of all domestic air and ground shipments travel less than 700 miles to their final destination. We expect that percentage to grow in coming years, as average domestic length of haul continues to drop. (See Exhibit 3.)
The reduction in the average length of haul has triggered profound changes in the country's transportation system. It has driven the decline in average shipment weight, the rapid growth of ground parcel and regional LTL traffic, and the corresponding stagnation in the air freight category. It has reduced the U.S. combination airlines (airlines that carry passengers and freight), which once controlled virtually all of the country's domestic air freight and airmail, to nonplayers in today's U.S. market. At last count, combination airlines controlled approximately 0.8 percent of all U.S. air freight traffic. Those carriers have virtually abandoned the second-day delivery segment and are unlikely to return.
The trend toward shorter hauls has even affected air freight carried by dedicated carriers, a service traditionally used to move goods over longer distances. According to our latest research, even the average air freight consignment is moving less than 600 miles.
Our shipment projections through 2007 forecast only incremental growth in the air segment and declines in the LTL and air export categories. However, we would not be surprised to see a brighter traffic picture for the long-haul LTL segment given the trend toward disaggregation that we highlighted previously.
Today's supply chain (and tomorrow's as well) demands rapid, timely and economical product turns. The shipper doesn't want to invest the time and the expense to build consolidations, especially as end-user buying patterns migrate toward disaggregation. The ultimate customer wants goods pumped out fast, on time, as needed and without the consolidator- style middleman. And the provider market must respond with continuous development of richer, more robust services backed by such value-adds as moneyback guarantees.