On Nov. 10, 2008, DHL Express announced that after six years of enormous losses, it would withdraw from the domestic U.S. parcel market by the end of January 2009. The news stunned an industry that believed DHL would scale back its U.S. presence but not end it. It wreaked havoc on the small southwest Ohio town of Wilmington—population 12,000—where DHL's U.S. air and ground hub was located and where one in three households had someone who worked there. And it left parcel shippers to the not-so-tender mercies of two companies: FedEx Corp. and UPS Inc.
Much has changed in the past five years or so. DHL Express ended domestic U.S. operations on Jan. 30, 2009, and the United States is to the company today what it has been for most of its 44-year history: one node in its vast global network. Each day, international packages fly in and out of Cincinnati, where DHL Express placed its U.S. hub serving international traffic after deciding it no longer needed a large operation in Wilmington to support a scaled-back service. There, the planes link with 30 freighters operating for the company across a 90-city U.S. network.
DHL Express is much better off since returning to its traditional knitting, according to Ian D. Clough, who has run U.S. operations since 2009. Profits from the U.S. business are "exceeding expectations," and revenues are growing at a double-digit annual clip, Clough said. He would not provide specifics. "We are playing to our strength," he said.
Although DHL left Wilmington, it did donate the facility, the nation's largest privately owned airport, to Clinton County, where Wilmington sits. Today, one-third of the three million square-foot site is occupied; it is used mostly for aircraft maintenance and repair services. About 1,000 people now work there, compared to 9,500 when DHL Express ceased operations.
Wilmington is still being marketed as an air logistics hub, and officials from the Cincinnati chapters of the Council of Supply Chain Management Professionals, the Warehousing and Education Research Council, and the supply chain and operations group APICS will convene there on Dec. 5 to check it out. For the past year, Jones Lang LaSalle (JLL), the Chicago-based real estate and logistics giant that is pitching the hub, has led an effort to clean out DHL's infrastructure because it was built for a parcel operation and not as a logistics center. That involved, among other things, hauling away 5,000 tons of steel and dismantling 26 miles of conveyor equipment, according to David Lotterer, JLL's vice president-industrial/supply chain & logistics solutions and the company's point man in Wilmington.
As for parcel shippers, they find themselves in an all-too-familiar spot: caught by what might be the most ironclad duopoly in American business. When DHL left, it took with it the third viable option for shippers, and the lowest-priced one at that. Since then, FedEx and UPS have dominated the nation's parcel market as have few companies have in any industry.
Regional parcel carriers are gaining modest traction. However, they control less than 2 percent of the market, according to Stifel, Nicolaus & Co., an investment firm. These regional carriers have limited coverage areas but offer low pricing, and, unlike FedEx and UPS, impose few so-called accessorial charges—fees for additional services beyond the basic pickups and deliveries that dramatically increase a shipping bill.
The U.S. Postal Service (USPS) has the resources to compete, but it is primarily focused on business-to-consumer (B2C) e-commerce, and not business-to-business (B2B). Shippers are also leery about working with USPS. More than half of the 48 shippers who responded to an October 2013 survey by San Diego-based consultancy Shipware LLC said they probably wouldn't use USPS as an alternative for the air and ground services offered by FedEx and UPS. The main reason cited by the shippers—who combined account for $1.5 billion in annual parcel spending—was that it was too hard to do business with USPS.
Left alone in the shipper henhouse, FedEx and UPS have feasted. According to Shipware, from 1998 to 2005 FedEx's published or "tariff" rates rose on average 3.06 percent a year for air and 3.05 percent a year for ground services. From 2006 to 2013, its air and ground tariff rates each climbed, on average, by 5.28 percent a year.
At UPS, the contrast between the two eras is even more pronounced. From 1998 to 2005, average air tariff rates rose 3.25 percent a year and ground tariff rates rose 3.16 percent a year. From 2006 to 2013, the rate of annualized increases for both products roughly doubled, according to Shipware data.
But even those increases don't tell the whole story. For example, each carrier assesses a minimum charge for each residential and commercial shipment moving by ground; both firms charged a minimum of $5.84, a 53 percent increase since 2006. For parcels weighing between one to 10 pounds, the bread and butter of package shipping, tariff-rate increases have been significantly higher than the average. FedEx Ground, the ground parcel unit of Memphis-based FedEx, this year raised tariff rates by 8.19 percent on shipments within that weight range, nearly doubling the 4.9-percent across-the-board increase, according to Shipware. By contrast, FedEx's rates for ground parcels weighing between 71 pounds and the 150-pound maximum were 4.02 percent, Shipware said.
Lest anyone think that FedEx isn't capturing much of the tariff bounty because many of its customers are under contract, Rob Martinez, Shipware's president and CEO, said about half of the company's customers ship under the tariff. FedEx and UPS representatives did not respond to e-mail requests seeking comment for the story.
Accessorials have also moved in lockstep. Each year, both carriers add new ones and increase the prices on those already in place. The big kahuna came in late 2010 when the companies changed their formulas used to calculate a shipment's dimensional weight. In virtually identical moves, each reduced their "volumetric divisor" to restrict the amount of cubic space allocated to their customers for the same shipment weight at the prevailing rates. Shippers whose packages fell outside the new physical parameters were hit with the equivalent of double-digit increases on their domestic and U.S. export shipments.
Martinez of Shipware estimates the carriers have so far collected about $500 million a year in revenue as a result of the change, with more coming once contracts get renewed or agreements that had stayed the impact of the adjustments expire. Jerry Hempstead, who today runs his own consultancy and is a former top U.S. sales executive with DHL and predecessor Airborne Express, which DHL bought in 2002, said DHL Express would have also gotten in on the action if it were still around. However, its presence as a low-cost option might have mitigated the overall impact of the change, he added.
LIKES AND DISLIKES
Shippers say they are generally satisfied with FedEx's and UPS' operational efficiencies and level of service. What they don't like is the carriers' opaque rate structure and their own lack of bargaining power. In the October Shipware survey, 64 percent said it was harder to negotiate with the carriers than it was several years ago. They said FedEx and UPS have no competition and are too focused on margin improvement than market share to cut shippers many breaks. In addition, 83 percent said the recent general rate increases have been "too high."
Few of the respondents have used regional carriers, but about a quarter of those who had said they saved more than 31 percent over FedEx and UPS. Another quarter said they saved between 6 and 10 percent. Although most respondents didn't care for USPS, about one-third of those who used a portfolio of its parcel services in order to be "modally optimized" reported savings of 25 percent over FedEx and UPS rates.
Where the parcel market goes from here depends on the channel of distribution. The B2C segment, which is showing substantial growth relative to the low single-digit growth of B2B, is being driven by large retailers like Amazon.com, Wal-Mart Stores Inc., and e-Bay, just to name a few. They, not the carriers, will call the shots. USPS—which recently announced a major revamp to its Priority Mail service in an effort to capture more e-commerce share—will be a more formidable competitor to FedEx and UPS for B2C delivery dominance.
By contrast, in the B2B world, the status quo could long remain in place. "It is very difficult to build a network and compete profitably against well-entrenched companies, as we found out," said Clough of DHL Express.
Martinez sees things differently, saying USPS is improving its B2B game. About one-third of Shipware's customer base, which is comprised of B2B and B2C shippers, now implement USPS' shipping solutions, he said. One example is Priority Mail's flat-rate pricing which could help minimize the impact of FedEx's and UPS' dimensional pricing changes on express shipments. Martinez added that regional carriers like Chandler, Ariz.-based OnTrac, which operates in eight western states including all of California, offer an increasingly viable alternative.
For many parcel shippers, a proper mix of geographically focused regional services, the relatively low-cost delivery options from USPS, and the breadth of coverage and service consistency of FedEx and UPS will provide effective shipping solutions at rates they can tolerate, he said.