A year ago, parcel carriers were awash in e-commerce–fueled shipments as homebound consumers, flush with Covid-stimulus cash, flocked online to buy everything from foodstuffs to furniture to home-improvement goods. Home deliveries and overall parcel volumes exploded. E-commerce levels once expected to take four years to reach arrived with a vengeance in 2021, stressing carrier service levels and consuming capacity.
A year later, e-commerce continues to drive strong parcel volumes. Despite consumers once again cruising the aisles at shopping malls, department stores, and big-box warehouses, those millions who discovered the ease and convenience of buying online and home delivery during the pandemic aren’t abandoning their digital shopping carts. They’re online, they’re staying there, they’re ordering nearly as much as ever, and they’re not going back.
The first quarter of 2022 saw parcel carriers report strong earnings and growth. Yet despite confidence in continued growth, the picture coming into focus for the remainder of 2022 is muddled. Challenges abound from issues already present and on the horizon: Painful, persistent inflation. Shrinking consumer paychecks and increasing living expenses across the board. Rising interest rates. Record-high gas prices. Continued supply hiccups impacting the production of everything from refrigerators to automobiles. And a stubborn resurgence of Covid-19 cases in China that’s locked down Shanghai’s port, has delayed ships, and threatens a repeat of last year’s port logjams and supply chain delays.
John Janson is senior director of global logistics at promotional products company SanMar, which operates eight distribution centers around the country and dispatches some 100,000 parcel shipments each night. He recalls seeing a recent overhead view of the Port of Shanghai and the surrounding waters. “You could hardly see water,” there were so many ships parked offshore, he notes. And stacks and stacks of containers waiting on shore. Rising Covid cases had dramatically curtailed port operations.
As cases subside and the port plays catchup, he fears “the potential to throw us right back into a very congested period” as a delayed surge of goods—a “bullwhip effect,” if you will—begins to make its way across the ocean, hitting U.S. ports in early to mid-June. “You look at the number of container moves Shanghai can do in an hour, and what they can do at [the ports of] Long Beach and Los Angeles. Just do the math. It will be hard for Los Angeles and Long Beach to catch up.”
He adds that the current negotiations between U.S. port operators and the International Longshore and Warehouse Union, which began in mid-May, create another potential concern. “We can’t afford to have the West Coast go on strike,” Janson says. He estimates that a one-week strike, timed just as the China surge of ships is arriving, “will cause three- to four-week delays in supply chain flows.”
David Gonzalez, VP analyst with research firm Gartner, echoes Janson’s China concerns. “We … expect service issues [on the Asia trades] and maybe some [canceled] sailings by ship lines as they try to recover from the delays.” He also notes that any significant resurgence of Covid cases in the U.S. would have supply chain implications as well, as rising cases could disrupt the pool of warehouse workers, truckers, and other logistics personnel who keep parcel volumes flowing.
Nevertheless, shippers are devising strategies and parcel carriers are marshaling their resources to meet the challenges, and hopefully continue the momentum they’ve enjoyed so far this year. Some dynamics that all players seem to agree on: Rates will increase, fuel and peak surcharges and accessorials will continue to be imposed, and carriers will do all they can to avoid odd-sized “ugly” shipments that are difficult and expensive to handle.
“Carriers have become very disciplined in understanding the effect of large and bulky packages,” notes Satish Jindel, chief executive officer of analytics firm ShipMatrix, adding that “it’s only ugly if it has bad pricing. When one of those [big and bulky shipments] displaces 10 or 20 smaller parcels, [carriers] are intent on making sure that the big and bulky shipment generates the same, or closer to the same, amount of revenue.”
Jindel adds that those shippers who want to secure reliable capacity will do best by forecasting their needs more precisely and updating them regularly; making their freight as efficient as possible for parcel carriers to pick up, process, and deliver; and helping carriers maximize use of every cubic foot of space on the truck.
Carol Tomé, chief executive officer of parcel giant UPS, in its first-quarter 2022 earnings conference call, noted as well the focus on quality traffic, improving productivity, and strengthening customer relationships. “We continue to pivot toward opportunity,” she said. “We are leveraging the power of our data to become much more agile. Under our ‘Better, not bigger’ framework, we are investing in the capabilities that matter most to our customers … this is about creating a frictionless customer experience.”
Technology investments are driving both better customer experiences and productivity gains at UPS. One initiative, its “Digital Access Program” (DAP), is helping speed the customer onboarding process, particularly with small and medium-sized businesses. In the first quarter, UPS created more than 500,000 DAP customer accounts, which is more than three times the number created in the first quarter of last year, Tomé said.
Investments in automated facilities along with productivity initiatives have enabled the company to eliminate 1,300 trailer loads per day. And the rollout of RFID (radio-frequency identification) technology, to be completed at 100 sort centers in 2022, is expected to eliminate manual scanning by pre-loaders and help reduce mis-sorts. “We’re really about putting our resources where we can get the highest return,” Tomé said.
As for pricing, “[it’s] really a function of demand and supply, and there is still a demand and supply imbalance, particularly in certain geographies around the world,” she said.
With respect to e-commerce behemoth Amazon, Tomé commented, “We have a very good relationship with Amazon. They are our largest customer,” she said, adding “we’ve reached agreement with Amazon about the packages that we will take in our network and the packages they will deliver on their behalf. And it’s a mutually beneficial relationship.”
Still, as shippers struggle to cope with the steady rise in parcel rates and challenges securing ample, consistent capacity, there remain cost-saving and efficiency-driving steps they can undertake to make their parcel traffic more attractive to carriers.
One area is packaging. “Shippers can focus on smarter packaging,” notes Helane Becker, who follows the parcel carrier market as senior research analyst covering airlines and air-related industries for investment firm Cowen & Co. “The one thing we still hear constantly is all these trucks cube out before they weigh out,” she says, noting that too often, shippers are putting a tiny box into a large box, wasting precious space and paying more than they should.
She recommends that shippers take advantage of services and resources available from both UPS and FedEx, which offer packaging tips “to help them ship more ‘ecofriendly’ and more efficiently, with less wasted space.”
ShipMatrix’s Jindel agrees. “[Shippers] need to work on getting rid of the ‘one-pound product tossed in a box that is designed for 15 pounds’ mentality,” he notes. He cites the example of a tube of mascara, which a colleague recently ordered. “A one- by three-inch tube, already packed in a small (1.5- by 1.5- by 3.75-inch) box came in a five- by eight- by 11-inch box. That’s 50 times the cube of the package it was already in. That’s a tremendous waste of packaging and shipping capacity. And the consumer is paying extra” for that unused space.
“Transportation is perishable,” explains Jindel. “If you don’t use it on the day you have it, it’s gone the next day.”
Cowen’s Becker points to another intractable, and likely worsening, issue for shippers and parcel carriers: finding and keeping enough skilled workers to work in warehouses and fulfillment centers, drive trucks, deliver parcels, and fly freighter aircraft. “We talked a lot about this during the past peak season,” she notes. “In 2018, UPS was hiring seasonal workers for $13 an hour. This past peak, it was hiring at $25 an hour. That’s a huge increase in labor expense.”
She also cites the projected retirement of aircargo pilots. “UPS and FedEx have a fair number of pilots retiring this decade,” she notes. At the same time, the traditional pool of replacement pilots, which normally come from regional passenger airlines, is under pressure from all-cargo airlines like Atlas Air and Amazon’s growing freighter fleet, which are hiring aggressively.
“We think pilot attrition in the regional airline industry is somewhere between 10% and 25%,” Becker says. “Forecasts project that the airline industry will have to hire 10,000 pilots a year to make up for attrition,” she notes. Yet the U.S. “only trains 5,000 a year.” She cited a comment by United Airlines’ CEO, who projects the shortage will last five years.
In the meantime, Becker says, “to the extent they can, [parcel carriers] will try to shift all they can from air to road,” where they will run smack into a shortage of drivers for trucks. “If you have to pay more to attract drivers, you are going to raise rates to cover it, and that just creates additional inflationary pressure.”
At the end of the day, “shippers who have undesirable freight will pay a heavy price for it,” says SanMar’s Janson. “Those who pit one carrier against [another] are the ones who will struggle and will face capacity constraints. [Parcel carriers] want to work with shippers who recognize the challenges they face and will work with them to help optimize their networks and the finite capacity they have available.”