Competition Within

The United States

Parcel Delivery Market

 by 

 

Alan Robinson, President
Direct Communications Group

2408 Colston Drive, #103 M Silver Spring, MD M 20910
Phone: (301) 589-6273 M Fax: (301) 608-3637 M E-Mail: alanrob@attglobal.net



Preface

This study of the American parcel delivery market was produced in part from a grant received by the author (Alan Robinson) from Deutsche Post World Net (http://www.dpwn.com/en_de/)The information and or opinions expressed in this report are solely the authorís. The author also would like to thank David Rawnsley of Postal Services, Inc, Aman Boyd, and Krisshawn Stanley for their research assistance in developing this paper.Comments on this report may be sent to the author at the address noted on the front page.

The report is being distributed by the Association for Postal Commerce (PostCom) with permission as a service to PostCom members and all others who share an interest in a vital, competitive postal services market. Comments on this report also will be accepted by the Association for Postal Commerce in writing (1901 N. Fort Myer Dr., Ste. 401, Washington, DC 22209-1609, U.S.A.) and by email (info@postcom.org).This report may be reproduced in whole or part in written or electronic form with the written permission of the author. Additional copies of this report can be obtained from the Associaton for Postal Commerce by way of a written or electronic request. 

Gene A. Del Polito, Ph.D.
President
Association for Postal Commerce
1901 N. Fort Myer Dr., Ste. 401
Arlington, VA 22209-1609
U.S.A.
Ph.: +1 703 524 0096
Fax: +1 703 524 1871
http://postcom.org


Table of Contents

Executive Summary

I.          Parcel Delivery Overview

Financial Comparisons
Operating Comparisons
Workforce Characteristics
Variable verses Fixed Networks
Integrated verses Parallel Networks
Joint verses Single-Line Service
Service Comparisons

II.        Competitive Structure

Type of Origin and Destination
Shipper Sophistication
Shape and Weight
Speed
Shape and Speed
Overall Market Growth

III.       Market Trends

Key Factors
Looking Toward The Future

IV.       Conclusion

Appendix A: Airborne

Corporate Overview
Services
Operating Characteristics
Retail Network
Labor Issues
Recent Developments

Appendix B: BAX Global

Corporate Overview
Services
Operating Characteristics
Labor Issues
Recent Developments

Appendix C: DHL

Corporate Overview
Services
Operating Characteristics
Retail Network
Labor Characteristics
Recent Developments

Appendix D: Emery Worldwide

Corporate Overview
Services
Operating Network
Emery and USPS
Recent Developments

Appendix E: FedEx

Corporate Overview
Services
Network Operations
Air Network
Ground and Delivery Networks
Retail Network
Labor Characteristics
FedEx and USPS
Recent Developments

Appendix F: UPS

Corporate Overview
Services
Network Operations
Ground Network
Air Network
Retail Network
Technology
Labor Issues
Recent Developments

Appendix G: United States Postal Service

Corporate Overview
Services
Network Operations
Postal Service Network
Contracted Transportation
Labor
Recent Developments

V.      Notes and Disclaimers


Executive Summary

In the coming year American consumers will spend more than $50 billion to ship parcels, packages, and overnight letters. This is an enormous sum, yet the importance of the delivery business to the economy is relatively unknown.

Why? Because while the delivery industry is an everyday necessity, much of the business news in the past several years has featured such "alluring" and "exciting" subjects as the Internet, e-commerce, DSL, and telecommunications.

So how big is this mundane business of delivering stuff? How important is it?

While the parcel, package and overnight delivery business is massive, figures from the Colography Group, an Atlanta market research organization which specializes in shipping and transportation issues, show that for the first three quarters of 2000 important industry sectors were dominated by a few major players. (Note 2),

In the "parcel" sector, a category which includes packages weighing from 2 to 70 pounds, UPS collected 63.9% of all revenue. UPS generated more than 80% of the revenue from parcels handled as "ground" shipments.

In the "overnight" category, FedEx took in 58.2% of all overnight letter receipts and 59.3% of all revenue from packages under 2 pounds.

The Postal Service generated 70.4% of the revenue from parcels under 2 pounds that were handled as a deferred air (2-3 day service).

The marketplace is not static however. In some important ways new parcel distribution patterns are beginning to develop. The Internet has expanded the reach of direct marketing; in particular the share of retail transactions requiring home delivery has grown. Globalization has created the need for parcel carriers to expand their networks worldwide.

Since the 2000 data was recorded, both FedEx and Airborne have significantly expanded their capability to compete with UPS's dominant ground delivery service. UPS has continued its strong marketing efforts in overnight and deferred air services. DHL has undergone a reorganization that may allow it to use its international strength to expand beyond its nominal position in the United States.

All of the private-sector carriers have introduced information system advances, including user-friendly Internet interfaces. The carriers have also expanded logistics offerings and improved integration with customer supply chains.

The Postal Service has raised rates faster than its competitors and frozen capital investment. Even with its financial challenges, the Postal Service has introduced new tracking technology.

Outside the United States, the parcel industry is also changing. Parcel carriers are challenging traditional national postal services. In addition, governments are transforming postal services by revamping management incentives and demanding improved financial and operational results. In some cases they're discussing -- and even implementing -- privatization. They're also reducing the letter and parcel monopolies once enjoyed by state-owned post offices, changes which have resulted in more intense competition for parcel revenues and volume.

The material presented in this study is designed to show the general state of the package, parcel, and overnight delivery systems. It has been written to identify old patterns and recognize new trends so that readers will have a better understanding of the parcel marketplace. Because much of the information found in this report is in constant flux, readers are advised to contact carriers directly for the latest news, information and service options.


I.        Parcel Delivery Overview

The United States parcel industry is composed of five large competitors capable of offering nationwide service: Airborne, DHL, FedEx, UPS and the United States Postal Service. (Note 3) In addition, multi-state parcel carriers operate in the northeast, mid-west and west coast. Finally, there are numerous firms offering local parcel delivery in a single city, and at least four offering services in multiple cities from coast to coast. (Note 4)

The parcel delivery industry has seen substantial consolidation over the past four decades. (Note 5) Two firms -- Emery (now part of Menlo Worldwide) and BAX Global -- handle parcels as part of their air freight business but effectively exited the market in the early 1990's.

Two significant carriers that were important in the development of the industry have completely vanished. These companies are REA Express and Purolator Courier.

REA Express operated between 1918 and 1975 and during its heyday was the largest ground and air express transportation service. REA Express was founded as the American Railway Express Company by the U.S. government after the private express carriers were nationalized along with the nation's railroads. After World War I, the railroads were re-privatized and -- in 1929 -- 86 of the country's railroads created a private company, Railway Express Agency. (Note 6) REA then purchased the American Railway Express Company and placed it back in private hands. The name was changed to REA Express in 1970 following its purchase by management. REA Express filed for bankruptcy in 1975, a failure attributed to management decisions, strikes by employees and competition from private carriers and the United States Postal Service.

Purolator Courier operated ground and air courier services in the United States starting in the mid-1960's. Purolator was independent until its United States operations were purchased by Emery in 1987. Onyx Corporation purchased the Canadian operations and later sold Purolator Canada to Canada Post. One year following Emery's purchase by CNF Corporation, CNF closed its Purolator subsidiary due to poor finical results. (Note 7)

More detailed descriptions regarding the five major competitors are included with the Appendices at the end of this report. 

Financial Comparisons

Financially-strong competitors have three important advantages over financially-weaker organizations.

First, while parcel delivery is primarily a labor-intensive activity, those carriers with the greatest financial resources are more likely to have the capital necessary to make investments in their network, information systems and logistics assets. Carriers with the resources to offer the broadest scope of services and geographic reach can serve a wider segment of the parcel shipping market than carriers with more limited resources.

Second, financially-strong carriers have a lower cost of capital than those with weaker finances. In particular, firms that can generate most of their capital internally have the greatest advantage.

Third, financially-strong carriers can afford to wait longer for investments to pay off than weaker competitors who may require more immediate paybacks.

Exhibit I-1 summarizes selected financial measures that are useful in understanding the major parcel carriers. The table provides financial data and ratios that measure the financial strength of the five major firms and also includes financial statistics for Burlington Global and Emery to illustrate the difference in scale between carriers offering parcel delivery and those offering air freight services.

Exhibit I-1

 

Comparison of Fiscal Year 2001 Parcel Carrier Financial Data

 

 

Airborne

Burlington Global

DHL

Emery

FedEx

United Parcel Service

United States Postal Service

 

Total U.S. Parcel Revenue (million $)

$2,851

$457

$580

$920

$12,430

$23,997

$7,906

 

Total Corporate Revenue (million $)

$3,211

$3,624

$23,393

$4,862

$19,629

$30,646

$65,834

 

Corporate Profit (Loss) (million $)

($19)

$16

$1,413

($403)

$584

$2,399

($1,680)

 

Operating Ratio

1.01

1.00

0.94

1.08

0.97

0.92

1.03

 

Shareholder's Equity     (million $)

$834

$476

$4,779

$638

$5,900

$9,735

($2,326)

 

Total Debt (million $)

$325

$298

$2,061

$448

$2,121

$3,238

$11,315

 

Current Ratio

0.96

0.88

4.77

1.50

1.06

1.64

0.11

 

Debt/ Equity Ratio

0.39

0.63

0.43

0.70

0.36

0.33

N/M

 

Total Cash (million $)

$202

$97

$1,755

$401

$121

$879

$1,005

 

 

 

 

 

 

 

 

 

 

Note 1: Figures are for the 2001 fiscal year.  FedEx year ended May 31.  USPS year ended September 30,2001.  All others ended December 31,2001.

Note 2: Corporate figures for DHL are for Deutsche Post.   U.S. Parcel Revenue is an estimate

 

 

 

Note 3: Corporate figures for BAX Global are for Pittston Brinks Group.

 

 

 

 

 

Note 4: Corporate figures for Emery are for CNF Corporation.

 

 

 

 

 

Note 5: Deutche Post figures are converted to U.S. Dollars from Euros at  a 1.12 Euro/Dollar conversion rate.

 

 

Note 6: Total United States parcel revenue for BAX Global, DHL, and Emery are estimated from Colography data.

 

Note 7: Operating ratio = (revenue - profit) / revenue)

 

 

 

 

 

 

Note 8:  U.S. Parcel Revenue for DHL is 2000 revenue provided by Colgoraphy Group.  2001 revenue data is likely lower.

 

Note 9: U.S. Revenue  for Emery is for North American operations

 

 

 

 

 

Note 10: All data unless otherwise noted is drawn from annual reports and statistical books published by the individual  companies.

N/M = Not meaningful.

 

 

 

 

 

 

 

 

 

UPS is the largest domestic parcel carrier with $24 billion in United States domestic revenue. UPS's domestic parcel business is three times the size of that of the United States Postal Service, twice as large as FedEx, and nearly ten times the size of Airborne, the fourth-largest U.S carrier. DHL's U.S. parcel/air freight business is less than 1/20th the size of UPS.

Comparing the firms in terms of total revenue paints a different story. The Postal Service generates the most revenue, over $65 billion. UPS is second with $30 billion. DHL -- if one includes the revenue of its parent company, Deutsche Post -- is third at $25 billion. (Note 8) Among the remaining companies, only FedEx with nearly $20 billion generates revenue of comparable size.

For Airborne, FedEx and UPS, domestic parcel delivery is the core of their global business. Airborne, FedEx and UPS respectively generate 89%, 63% and 78% of their revenue from hauling parcels in the United States. Most of the remaining business involves international service with much of that to or from the United States. FedEx's percentage is the smallest due to its significant operations providing both heavier weight air cargo services and less-than-truckload freight services in the United States. DHL is just the opposite as most of its revenues are generated outside the U.S. The Postal Service receives the bulk of its revenue from handling letters and advertising within the United States.

UPS is the most profitable of the parcel carriers, generating $2.4 billion in profit during fiscal 2001. FedEx had a profit of $584 million in fiscal 2001, or less than one quarter of the industry leader.

The situation with DHL is more complex: DHL's profit was unknown as it was privately held in 2001. Access to profits from Deutsche Post, the current owner of DHL, are restricted. Total Deutsche Post profits of 1.6 billion Euros in 2001 came from both mail operations and private-sector Deutsche Post activities. Profits from Deutsche Post mail operations are not available to underwrite private-sector activities.

The remaining carriers had minimal profits or losses in 2001, while in fiscal 2001 the U.S. Postal Service had a loss of $1.68 billion.

The operating ratio (revenue - profit/revenue) measures the ratio of costs after taxes and revenue. Lower operating ratios indicate better operating performance. UPS's operating ratio is the best at .92. Only FedEx and Deutsche Post had operating ratios substantially less than 1.0 in 2001. The Postal Service's operating ratio of 1.03 indicates that it lost 3 cents for every revenue dollar in 2001.

UPS's shareholder equity, at $9.7 billion, is more than 60% greater than that of its nearest competitor, FedEx. Shareholder equity at FedEx is about $1 billion more than Deutsche Post. Airborne's shareholder equity is less than one-tenth that of UPS.

The United States Postal Service is unique in that it has a negative "shareholder" equity. The Postal Service's negative equity reflects a legislative break-even requirement that causes the Postal Service to seek zero profits while private-sector carriers try to maximize net income.

In fiscal 2001, the Postal Service had total operating revenues of $65.834 billion. Of this amount, $7.906 billion was related to parcels and packages: Priority Mail ($4.9164 billion), Express Mail ($0.9957 billion), and Package Services ($1.999 billion).

UPS's debt is higher than all carriers except for the Postal Service. The Postal Service's debt/equity ratio cannot be measured because it has a reported negative net equity.

The current ratio provides an indication of liquidity. Deutsche Post's figure may be misleading due to assets owned by its banking subsidiary. Among the remaining carriers, UPS and Emery appear to have the most liquidity. The Postal Service is nearly illiquid because current assets are dwarfed by current liabilities.

Overall, UPS comes to the market with the strongest financial position. It generates the largest profits, has the best operating ratio, debt-to-equity ratio, and is tied with Emery for the best current ratio. It has an AAA credit rating.

Operating Comparisons

All parcel carriers have the challenge of providing delivery services from any point to any other point in the United States. The result is that the physical processes and transportation networks they employ have significant similarities.

All carriers use hub-and-spoke systems to speed both ground and air parcels. All carriers have a primary air hub in the mid-section of the United States -- Airborne, in Wilmington (OH); DHL in Cincinnati (OH); FedEx in Memphis (TN), UPS in Louisville (KY); and USPS in Indianapolis (IN). Airborne, FedEx, and UPS all have supplementary air hubs to handle express volumes. The Postal Service also uses the FedEx hub for shipments hauled under contract.

All carriers also use local distribution centers from which carriers or drivers deliver shipments to their ultimate destinations.

The primary differences in the carrier networks revolve around the provision of ground delivery parcels or parcels designed to take from 2 to 5 days to deliver. Both UPS and the Postal Service have long-standing ground delivery service networks that handle substantial volumes. Fedex and Airborne are newer and their ground delivery networks reflect their more recent origin. (Note 9) DHL is just now developing its ground delivery network. 

There are four parameters carriers face when trying to profitably offer services:

        Workforce characteristics

        Variable verses fixed network

        Integrated verses parallel networks

        Joint verses single-line service

Workforce Characteristics

Parcel delivery carriers use unionized employees, non-union employees and contractors to deliver parcels. Different workforce characteristics impact the ability of management to control labor costs. Carriers with the highest concentration of unionized employees have less flexibility and higher unit labor costs than those that primarily use non-union or contract employees

Nearly all UPS employees who deliver, transport or sort parcels are represented by a union. Maintenance workers, mechanics and pilots are also unionized. The Teamsters are the largest union working with UPS.

All Postal Service craft employees who sort, transport and deliver parcels are represented by one of four unions (American Postal Workers Union, National Postal Mail Handlers, National Association of Letter Carriers, and National Rural Letter Carriers Association) depending on the activity. Lower level management employees (supervisors and postmasters) are represented by management associations. The Postal Service also contracts for transportation services and delivery in many rural locations.

Other carriers are organized to a limited extent. Airborne, DHL and FedEx pilots are all organized. DHL dispatchers are members of the Teamsters Union, but all other DHL employees are not organized and some DHL deliveries are done by contractors.

Airborne terminal, delivery drivers, and over-the-road drivers are all members of the Teamsters Union. Airborne's Teamster contracts are somewhat less generous than that signed by UPS. Most importantly for Airborne, contractors rather than unionized employees deliver more than half of Airborne's shipments.

The composition of FedEx delivery drivers differs for its Express and Ground Services. (Note 10) Express delivery personnel are mostly non-union employees. Ground delivery is primarily provided by contractors.

Variable verses Fixed Networks

It's hard to match delivery networks with volume on a daily basis. Costs per unit are highest when network costs are fixed but volume is low.

Carrier networks are most fixed when company assets and employees are used to provide services. The capital resources necessary to buy airplanes, build sortation hubs, and purchase delivery vehicles are substantial. All major carriers except the Postal Service run their own airlines and can be described as fixed-network operators relative to their Express and Deferred Air services.

The major carriers also have substantial sortation facility investments for both air and ground services.

The Postal Service purchases all of its air and rail transportation and most of its truck transportation under long-term contracts, so its network has variable cost characteristics. UPS contracts for substantial rail transportation to haul trailers long distances. Airborne and FedEx contract for significant portions of their inter-city truck transportation.

Carriers that employ networks using employees to transport, sort and deliver parcels have costs that are the most fixed over the short run. Airborne, UPS, and FedEx have made most of their sortation employees part-timers to create labor-cost flexibility. USPS has the least flexibility because most of its sortation employees are full-time workers.

Contracting for services is the primary means of controlling network costs. Airborne, DHL and FedEx Ground use contractors extensively for delivering parcels. For these carriers, delivery costs depend on the number of parcels that contractors deliver. Regular industrial engineering studies are used to align routes to match volumes and minimize delivery costs. 

For carriers using more fixed, employee-staffed networks for delivery, regular industrial engineering studies are used to align routes to match volumes and minimize delivery costs subject to limitations that employee contracts allow.  UPSís industrial engineering expertise has long been a competitive advantage.

Flexibility has been important for both FedEx and Airborne. Both expanded thief ground operations by minimizing the use of new resources that would add to their fixed costs or increase fixed characteristics of their network.

Integrated verses Parallel Networks

All carriers except FedEx operate an integrated network. Integrated networks deliver all parcel products from overnight service to ground delivery service using the same set of local resources, and in some instances the same delivery routes. (Note 11)

In contrast, FedEx operates three separate delivery networks. First, it operates a network for air express shipments. Second, it operates a ground network for business delivery locations. Third, it operates a ground network for home deliveries.

FedEx uses the same inter-city transportation network for both of its ground delivery systems. By keeping its Express and Ground networks separate, FedEx has reduced the risk of having its FedEx Express delivery drivers and package sorters becoming organized. As long as Express employees only deliver air-express shipments, FedEx has argued, these employees fall under the Railway Labor Act which makes organizing more difficult than would be the case if they were considered part of a trucking operation and thus subject to the National Labor Relations Act. In 2001, the U.S. National Labor Relations Board ruled that FedEx Ground was a trucking company and thus subject to the NLRA and could now be organized piece-by-piece, a ruling which had been sought by the Teamsters.

Joint- verses Single-Line Service

Joint-line service differs from single-line service in that in single-line service a customer understands that a single firm is responsible for the end-to-end transportation, while in joint-line service a customer understands that two or more carriers will be involved in the provision of the service.   In the parcel industry, single and joint-line services are clearly marketed as such to customers.  Joint-line service requires both a transfer of the physical possession of the shipment as well as the legal responsibility for carriage.   Joint-line service requires that the origin and destination carriers negotiate terms of transfer and payment for services that the destination carrier will be paid. The prices that the Postal Service is paid for providing delivery as part of a joint-line service and some of the terms of transfer is subject to regulatory approval by the Postal Rate Commission.

All parcel carriers provide their domestic express and deferred air delivery as a single-line service. All carriers except the Postal Service and Airborne provide ground service as a single-line service as well.

Most of the Postal Service's ground parcel business with commercial customers is joint-line service. The Postal Service's retail customers are served through a single-line service with the Postal Service providing delivery to destination.

Airborne provides home delivery service to its customers via its airborne@home product. The Postal Service provides delivery using the terms and conditions specified by the Parcel Select product. Airborne's ground service is provided as a single-line service. 

Service Comparisons

Exhibits I-2 through I-6 illustrate the differences and similarities in the services offered by various carriers. Exhibit I-2 illustrates that DHL offers the most limited set of services among the competitors. FedEx and UPS offer a nearly identical set of services. Airborne's service levels are slightly lower than the two largest express services. Specialized divisions offer same-day services for all carriers. The DHL Ground service is currently in a test phase and is only available on a limited basis.

  Exhibit I-2:  Product Offerings

 

 

 

 

Carrier

  Products

Airborne

DHL

FedEx

UPS

USPS

  Electronic

 

 

 

A

 

  Same Day

A

A

A

A

 

  Next Day- Early A.M.

10:30

 

8:00

8:00

 

  Next Day Morning

12:00

10:30

10:30

10:30

12:00

  Next Day Afternoon

15:00

15:00

15:00

15:00

 

  2nd Day A.M.

 

 

 

12:00

 

  2nd Day

A

 

A

A

AB

  3rd Day

 

 

A

A

 

  2-4 day

B

 

 

 

AB

  Ground

A

C

A

A

AB

  International

AB

A

AB

AB

B

  Logistics

A

A

A

A

 

  Freight ( >150 lbs.)

 

 

A

A

 

 

A Single-line service

B Joint-line Service 

C Limited Availability

Source: Carrier Service Guides

 

Exhibit I-3 shows the difference in carrier payment methods. The payment options available to Postal Service customers are different because payment prior to parcel acceptance is required -- all other carriers require pre-payment only for retail customers. The table also illustrates the importance of information systems: The private-sector carriers offer manifesting system software -- and sometimes hardware -- to simplify the payment process.

Exhibit I-3:  Payment Options

 

 

 

 

Carrier

  Payment Options

Airborne

DHL

FedEx

UPS

USPS

  Debit EFT

A

A

A

A

A

  Monthly Prepayment

 

 

A

A

A

  Bank Freight Payment

A

A

A

A

A

  Receiver Billing

B

A

B

B

 

  Shipper Billing

A

A

A

A

 

  Prepaid Labels

A

 

 

A

 

  Credit Card

A

A

A

A

B

  On-line Invoices

A

A

A

A

B

  Consolidated Weight

A

A

A

A

 

  Carrier Provided Manifesting System

A

A

A

A

B

  Single Manifest/Label

A

 

A

A

A

  Postage Meter

 

 

 

 

A

  Stamps

 

 

 

 

A

A Offered on all parcel services    

B Offered on some products

Source: Carrier Service Guides

 

Exhibit I-4 depicts the different service options available from the carriers. The Postal Service offers the most limited set of services while DHL offers a more limited services than its private-sector competitors. This table also illustrates the rapid deployment of systems allowing carriers and shippers to notify recipients by e-mail about coming shipments.

Exhibit I-4:  Service Options

 

 

 

Carrier

  Service Options

Airborne

DHL

FedEx

UPS

USPS

  Saturday Delivery     

A

A

A

A

A

  Saturday Pick-up

A

A

A

A

A

  Hold for Pick-up

A

A

A

 

A

  Delivery Confirmation

A

A

A

A

A

  Verbal Delivery Confirmation

A

A

A

A

 

  Internet Confirmation

A

A

A

A

 

  Shipment Notification

 

A

A

A

 

  Hazardous Materials

A

A

A

 

 

  Medical Shipments

A

A

 

 

A

  Insurance

A

A

A

A

A

  C.O.D Service

A

 

A

A

A

  Return Service

A

 

A

A

B

  Track & Trace

A

A

A

A

BC

  Air Charter

A

 

A

 

 

 

A Offered on all parcel services   

B Offered jointly with second firm 

C Offered on some products

Source: Carrier Service Guides


Exhibit I-5 summarizes the differences in network access options available from various carriers. All carriers have pickup services. However, parcel consolidators pick up most of the Postal Service's parcels at the shipper's location. Airborne, FedEx, UPS, and the Postal Service all have branded retail centers available for parcel drop off. Airborne has retail counters in Office Max stores. FedEx has its own storefronts as well as counters in Kinko's. UPS has counters in both Staples and Office Depot stores and is in the midst of re-branding its Mail Boxes Etc. stores as UPS stores. The Postal Service has thousands of local post offices. DHL has a retail network limited to urban centers.  Drop boxes for the all carriers can be used for all services except ground delivery.

Exhibit I-5:  Network Access Options  

 

 

 

Carrier

  Network Access Options                   

Airborne

DHL

FedEx

UPS

USPS

  Pick-up Service

A

A

A

A

A

  Drop Boxes

B

B

B

B

B

  Internet Acceptance Locator

A

A

A

A

A

  Kinko's without surcharge

 

 

A

A

 

  Carrier owned Retail Network

 

A

A

B

 

  Office Supply Stores without surcharge

A

 

 

A

 

  Mail Sending Agents with surcharge

 

A

A

A

A

  Printer Ė agents

A

 

 

 

 

  Post Office Box Delivery

B

 

 

 

A

  Post Offices

 

B

 

 

A

  Wholesale receipt (downstream access)

 

 

 

 

A

A Offered on all parcel services    

B Offered on limited products

Source: Carrier Service Guides

Exhibit I-6 looks at service guarantees. The Postal Service is the only carrier offering ground and deferred air services that does not guarantee transit time. The Postal Service offers methods to confirm receipt for parcels, but that system does not match the full track-and-trace capabilities of its competitors.

Exhibit I-6:   Service Guarantee Options

Carrier

  Service Guarantee Options

Airborne

DHL

FedEx

UPS

USPS

  Delivery failure

A

A

A

A

B

  Tracking failure

A

A

A

A

B

  Days to present claim

15

30

15

15

 

  Day claims period starts

Shipping Date

Shipping Date

Shipping Date

Delivery Date

 

  Service Guarantees Subject to Negotiation

A

 

A

A

 

  Automated refunds

 

 

B

 

 

  Christmas blackout days

14R

 

14R

14R

 

  Possible guarantee checking charge

A

 

 

A

 

  Rural restrictions

A

 

 

A

 

  Residential restrictions

A

 

 

A

 

A Offered on all parcel services    

R Restriction on some products

B Offered on some products

Source: Carrier Service Guides

 

One of the challenges shippers have is claiming refunds. Most carriers limit the time available to claim refunds. FedEx offers larger shippers an automated system for removing freight charges when guaranteed delivery times are missed. Both Airborne and UPS have the option of charging shippers who use the web-based track-and-trace system to identify late shipments. Airborne and UPS also have guarantee restrictions for rural and residential destinations, destinations that are often difficult to reach on schedule.


II. Competitive Structure

To understand the parcel-shipping choices consumers find in the marketplace it's useful to consider how competitors match up. Highly-competitive markets offer consumers multiple suppliers of a required service with no single supplier garnering the lion's share of the available business. Markets with dominant suppliers are those in which one or two suppliers control the vast majority of the business. This section examines how years of competition have generated the relative market strength of the major competitors.

The various sub-markets in the parcel business are defined by four factors: the type of destination; the sophistication of the shipper; the delivery speed required; and the shape and weight of the shipment. (Note 12)

Type of Origin and Destination

The type of origin and destination determines delivery difficulty and the effort need to attract customers. This is typically described in a two-by-two matrix involving businesses and consumers as illustrated in Exhibit II-1.

 

Exhibit II-1:  Market Matrix

Shipment Origin

Shipment Destination  

Business  

Consumer  

Business

B-B

B-C

Consumer  

B-C

C-C

 

Consumer-originating markets require a retail infrastructure or on-demand pickup capability that easily accepts individual parcels. The consumer-originating market also includes occasional small business customers.

Business-originating markets include markets where regular pickups justify a more personalized sales effort. Such markets generally involve carriers offering specific customer pricing

Delivering to consumers requires a specialized infrastructure because most consumers are not home during business hours to receive parcels. The USPS uses its standard six day-a-week network to deliver parcels and holds packages at retail post offices when recipients are not home. For small parcels, the USPS has the capability of leaving items in the mailbox unsecured. Airborne has chosen to use the USPS to provide delivery to home addresses. FedEx has set-up a separate delivery network for residences that offers Saturday, later afternoon and early evening deliveries. UPS uses its standard delivery network.

The private-sector carriers accommodate the different costs associated by charging different prices for business and home deliveries. The Postal Service does not. (Note 13

Exhibit II-2 illustrates the proportion of parcel volume destined for business and consumer (residential) addresses by shipping mode. This Exhibit shows that the vast majority of parcel volume is between businesses.

 

Exhibit II-2

Proportion of

Business to Business and

Business to Consumer Shipments

by Parcel Delivery Mode

in 2000

 

 

 

 

Delivery Market

Parcel Delivery Mode

Business to Business

Business to Consumer

Overnight

83%

17%

Deferred Air

76%

24%

Ground

68%

32%

Source: Colography Group

 

 

Exhibit II-3 provides the same statistics for the Postal Service. This table shows that the Postal Service's market differs from the private sector only in the delivery of ground parcels. The majority of the Postal Service's parcel business involves deliveries to consumers while the vast majority of all ground shipments are delivered to businesses. The proportion of business-to-business shipments for overnight and deferred air shipments that the Postal Service handles are nearly identical to that carried by the private sector.

Exhibit II-3

Proportion of USPS

Business to Business and

Business to Consumer Shipments

by Parcel Delivery Mode

in 2000

 

 

 

 

Delivery Market

Parcel Delivery Mode

Business to Business

Business to Consumer

Overnight

83%

17%

Deferred Air

74%

26%

Ground

48%

52%

Source: USPS response to UPS interrogatories in R2001-1.

           to George Tolley ( UPS/USPS T-7-19 to T-7-24) and

            to Gerald Musgrave (UPS/USPS T-9-1 to T-9-6 and

            UPS/USPS T-9-8 to T-9-12)

 

Shipper Sophistication

One way carriers divide markets is to look at the level of personal attention customers require. In general, the larger the customer's daily shipping volume, the more personal attention the customer receives. For illustrative purposes, the parcel market can be divided into three consumer groups according to the level of required personal attention.

High Touch. Customers with the highest shipping volumes. The largest catalog retailers and electronics firms are included in this group. They are served by a dedicated sales representative who works with less than a dozen clients. The carrier often has administrative staff to cover customer service inquiries. These customers are the most likely to seek regular competitive bidding for delivery services. 

Medium Touch. Customers with substantial volume but not enough to justify a dedicated sales staff. Sales representatives serving these customers can have as many as 100 customers. Carriers provide support through call centers and the Internet. These customers negotiate discounts with carriers but are less likely to use a formal bidding process.

Low Touch. Customers with small parcel volumes. They often require access to on-demand pickup services instead of daily pickup services. Customers in this group may also use retail access points. Carriers provide customer support via call centers and the Internet, and they offer the smallest corporate discounts to these customers. Association marketing efforts are examples of service to low-touch clients.

Shape and Weight

The shape and weight of an item can affect carrier operations in two ways. First, the shape impacts the type of equipment needed in a distribution hub. Second, shape and weight affect the nature of the delivery. Competitors in the parcel industry handle four types of shipments:

Letters - Letters are items that can be sorted on high-speed automated equipment and held by an employee when delivering. Letters most often contain folded or flat documents but may contain other media in an envelope.

Packets - Packets are small parcels under 2 pounds. Because packets come in odd shapes and sizes they cannot be sorted on equipment used only for documents. Packets are conducive to delivery by the Postal Service because letter carriers can easily carry such items.

Parcels - Parcels are items over 2 pounds but under 70 pounds.

Freight - Individual items over 70 pounds. Freight may also include multiple parcels sent to a single destination. Freight shipments handled by air typically weigh less than 200 pounds while those shipped by ground transportation are far heavier. 

Exhibit II-4 illustrates the differences in marketshare across the four shape/weight categories. The exhibit indicates that the FedEx dominates the overnight letter market. However, FedEx faces intense competition in that market as UPS, Airborne, and the Postal Service all have more than 10% of the revenue. No other carrier has more than 2.5% of the letter market.

 

Figure II-4

Revenue Market Share Across Shape Based Sub-markets

 

 

 

 

 

 

 

 

 

 

Carrier

Sub-markets

Airborne Express

BAX Global

DHL

Emery

FedEx

United Parcel Service

USPS

All Other Competitors

Overnight Letters

10.9%

0.0%

2.4%

0.1%

58.2%

15.6%

12.2%

0.5%

Packets

9.7%

0.1%

0.9%

0.1%

33.8%

17.8%

34.2%

3.5%

Parcels

4.0%

0.2%

0.9%

0.2%

18.8%

63.9%

9.2%

2.9%

Air Freight

0.9%

9.9%

1.4%

13.5%

11.1%

            -

            -

63.3%

Note 1:  Estimates are for the first three calendar quarters of 2000.

 

 

 

 

Note 2:  Letter data excludes deferred letters which are handled as mail. 

 

 

 

Source: Colography Group

 

 

 

 

 

 

 

The packet market is also quite competitive. Both FedEx and the Postal Service have a little more than one-third of the market and UPS has one-sixth of the revenue generated by carriers handling small parcels. Airborne also provides serious competition by holding nearly 10% of the packet market.

The parcel market, parcels over 2 pounds, is the most concentrated of the four shape-based sub-markets. UPS earns nearly 64% of the revenue generated in the parcel delivery market.

The air freight market is the most competitive. No single carrier generates more than 15% of the market's revenue.

Differences between each carrier's focus can be further identified by overnight and deferred air parcels over 2 pounds. The average weight of parcels over 2 pounds that the Postal Service handles is less than 5 pounds, while parcels delivered by its competitors typically weigh more than twice as much.

Speed

Most carriers divide their product offerings by the speed of service to meet three different market needs.

        First, they offer overnight service. Overnight service also contains a number of variations from early morning to late afternoon delivery.

        Second, most carriers also offer a second-day or deferred service.

        Third, carriers offer a deferred service related to the time required to deliver parcels by ground transportation modes. With the exception of the Postal Service, all carriers back-up advertised service commitments with money-back guarantees.

The first two options are most often provided as an "air service" and the last is classified as a "ground" service. This does not necessarily mean that the package classified as an "air parcel" actually travels on an airplane. For many short-distance shipments, the "air" service is actually performed using truck transportation.

Exhibit II-5 displays the revenue marketshare of the major air freight and parcel carriers by shipment speed for the first three calendar quarters in 2000. The exhibit shows that the overnight market is quite competitive with FedEx and UPS both generating more than 25% of the overnight revenue and Airborne holding more than 10%. The deferred market is equally competitive with both the Postal Service (USPS) and FedEx having more than 20% of the revenue while UPS has nearly 20%. In the ground market, UPS generates more than three-quarters of the revenue. UPS's next-largest competitors are FedEx and the Postal Service with 10.6% and 6.8% of the market's revenue, respectfully. Airborne's ground marketshare was zero during this period because it did not begin to offer ground service until 2001.

Figure II-5

Revenue Market Share Across Speed Based Sub-markets

 

 

 

 

 

 

 

 

 

 

Carrier

Sub-markets

Airborne Express

BAX Global

DHL

Emery

FedEx

United Parcel Service

USPS

All Other Competitors

Overnight

11.4%

1.9%

2.7%

2.9%

39.8%

28.9%

5.2%

7.1%

Deferred

4.3%

1.7%

0.4%

1.8%

20.9%

19.7%

34.9%

6.5%

Ground

0.0%

0.0%

0.0%

0.0%

10.6%

77.3%

6.8%

5.3%

Note 1:  Estimates are for the first three calendar quarters of 2000.

 

 

 

 

Note 2:  Deferred data excludes deferred letters under 11 ounces which were handled as mail. 

 

Source: Colography Group

 

 

 

 

 

 

 


Shape and Speed

Exhibit II-6 illustrates revenue marketshare by shape and speed sub-markets. This exhibit shows that shape and speed sub-markets are substantially concentrated.

Figure II-6

 

 

 

 

 

 

Revenue Market Share Across Shape and Speed Based Sub-markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrier

 

 

 

 

 

 

Sub-markets

Airborne Express

BAX Global

DHL

Emery

FedEx

United Parcel Service

USPS

All Other Competitors

 

 

 

 

 

 

Overnight Letters

10.9%

0.0%

2.4%

0.1%

58.2%

15.6%

12.2%

0.5%

 

 

 

 

 

 

Overnight Packets

18.0%

0.1%

1.9%

0.1%

59.3%

11.4%

5.4%

3.8%

 

 

 

 

 

 

Deferred Packets

6.2%

0.0%

0.4%

0.0%

14.4%

8.4%

70.4%

0.2%

 

 

 

 

 

 

Ground Packets

              -

            -

            -

           -

15.9%

43.1%

33.1%

7.9%

 

 

 

 

 

 

Total Packets

9.7%

0.1%

0.9%

0.1%

33.8%

17.8%

34.2%

3.5%

 

 

 

 

 

 

Overnight Parcels

11.0%

0.4%

3.3%

0.6%

28.3%

52.0%

2.7%

1.7%

 

 

 

 

 

 

Deferred Parcels

5.0%

0.3%

0.3%

0.1%

27.2%

33.1%

33.8%

0.1%

 

 

 

 

 

 

Ground Parcels

              -

            -

            -

           -

10.1%

83.4%

1.6%

5.0%

 

 

 

 

 

 

Heavy Ground Parcels

              -

            -

            -

           -

14.4%

85.6%

            -

                 -

 

 

 

 

 

 

Total Parcels

4.0%

0.2%

0.9%

0.2%

18.8%

63.9%

9.2%

2.9%

 

 

 

 

 

 

Overnight Freight

1.6%

15.3%

2.3%

22.8%

9.0%

            -

            -

49.0%

 

 

 

 

 

 

Deferred Freight

0.3%

6.4%

0.7%

7.3%

12.5%

            -

            -

72.7%

 

 

 

 

 

 

Total Air Freight

0.9%

9.9%

1.4%

13.5%

11.1%

            -

            -

63.3%

 

 

 

 

 

 

Note 1:  Estimates are for the first three calendar quarters of 2000.

 

 

 

 

 

 

 

 

 

 

Note 2:  Letter data excludes deferred letters which are handled as mail. 

 

 

 

 

 

 

 

 

 

Source: Colography Group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit II-7 lists the top three carriers for each sub-market and shows that different carriers have different strengths.

       Exhibit II-7:  Summary of Market Leaders In 2000

                   Shipment Speed

Shipment Shape / Weight

Overnight

Deferred 
(two to three days)

Ground

Letter

FedEx
UPS
Airborne

USPS

USPS

Packets 
(parcels < 2 lbs)

FedEx
Airborne
UPS

USPS
UPS
FedEx

UPS
USPS
FedEx

Parcels 
(parcels > than 2 lbs)

UPS
FedEx
Airborne

USPS
UPS
FedEx

UPS
FedEx
USPS

Freight  
(shipments > 100 lbs) 

Other
Emery
BAX Global

Other
FedEx
Emery

LTL

 

UPS is the market leader in 4 of the 11 sub-markets analyzed and tied with the Postal Service in the handling of parcels weighing less than 2 pounds. UPS's success in the markets for speedy transportation of parcels may come from its ability to pickup packages requiring different levels of speed from the same shipper using its integrated pickup operation, an operating and marketing advantage that only UPS had during this period.

Like UPS, both FedEx and the Postal Service also compete in sub-markets in which they generate more than 50% of the revenue. (Note 14)

FedEx leads in two of the sub-markets and is tied with UPS with one. Its strengths reflect FedEx's origins in both overnight envelope transportation and Flying Tiger's heavier air freight business. FedEx's small marketshare in parcel markets indicates that it has a stronger position in express documents than it has in shipping goods.

USPS is the market leader in air packets under 2 pounds that require 2-day or longer service, regardless of whether the package is handled as a ground or deferred air parcel. As a group, packets have physical characteristics closest to the Postal Service's letter services. The Postal Service also does well handling larger parcels that require 2- to 3-day deferred-air service.

Airborne's business looks similar to that of FedEx. However it is significantly smaller and had no ground delivery product through 2000.

Emery appears to be the market leader in the overnight freight business. A substantial portion of its overnight freight volume reflects the contract that Emery held to haul Express mail for the Postal Service in 2000. The marketshare that Emery and BAX Global have in other parcel markets illustrates the exit of these carriers from these markets in the early 1990's. The parcel business that these carriers handle is clearly incidental to their heavier freight service. (Note 15)

DHL has little parcel marketshare. Its strongest market is overnight letters.

Overall Market Growth

The overall parcel market grew from $33.8 billion to $48.2 billion in revenue between 1995 and 2000. The growth in shipments was similar, rising from 5.35 billion in 1995 to 6.5 billion in 2000.

Exhibit II-8 illustrates the average growth rate of sub-markets that parcel carriers serve. The exhibit shows that the fastest-growing revenue markets involved the overnight and deferred handling sectors. The differences in the revenue and shipment growth rates in various markets reflect contrasting levels of competition in various markets. The overnight envelope and letter market with five active competitors shows a growth in revenues only three-tenths above the shipment growth rate. The ground packages market shows both the slowest growth rate and the biggest difference between the growth in revenue and shipments. The ground parcel market had the smallest number of active competitors in that period. 

Exhibit II-8

Parcel Revenue and Shipment

Average Annual Growth Rates

(1995-2000)

 

Revenue

Shipments

 Overnight Envelopes and Letters

8.9%

8.6%

 Overnight Packages

11.0%

9.3%

 Deferred Packages

10.8%

7.3%

 Ground Packages

6.0%

2.3%

 All Envelopes, Letters and Packages

8.5%

4.6%

 Source:  Colography Group  

   


III. Market Trends

When analyzing the US domestic delivery industry, it's important to separate cyclical (short term) from secular (long term) influences.

Clearly, the U.S. economy has slowed from the robust levels achieved through 2000. Current projections indicate that sluggish growth will last through at least the first half of 2003, a downturn that has significantly affected the air freight portion of the parcel business. The heavy-freight carriers saw double digit declines in volume in 2001 as compared to 2000 and did not see to volume growth return until the summer of 2002. USPS has seen double digit declines in its Express Mail and Priority Mail products. Airborne and FedEx have both seen single-digit declines in domestic air express volumes, counter-balanced by robust growth in their newer ground services.

The cyclical downturn has been intensified by the dual tragedies of September 11 and the anthrax-laced letters sent through the postal system. The terrorist attacks had the following impacts:

These economic factors are expected to be short-lived, however their impact will depend on the financial health of each competitor going into the cyclical downturn. UPS and FedEx are in the strongest financial position as they continue to earn profits while Airborne appears to have returned to profitability.

The Postal Service entered the economic slowdown in a much weaker position than its competitors. A combination of a rate increases, capital spending freezes and cost controls has prevented the Postal Service from facing an immediate cash crisis. The recent discovery of a potential over-funding of Postal Service pension liabilities raises the possibility that projected rate increases can be delayed.

Even with this financial windfall, the Postal Service will need an improved economy, especially advertising revenue. Without it, the Postal Service will have limited cash for restructuring its network or developing information systems comparable to that offered by private-sector competitors.

Clearer are the secular or long-term elements that will affect business throughout the coming decade. These are the "pulls and pushes" that delivery services must plan during this current period of business stagnation and reduced cash flows. Those organizations that best prepare themselves going forward into 2003 will strengthen their position toward the end of the decade.

Key Factors

Some of the key factors that must be recognized as having structural implications for the delivery industry include the following:

Information, Communications and Technology (ICT) - ICT has speeded up business-to-business (B-2-B) and business-to-consumer (B-2-C) communications. ICT is the key to improving data flow, increasing information access, expanding financial control, and reducing dependence on hard copy movement. ICT therefore:

1. Promotes supply chain management (SCM) efficiencies;

2. Improves logistics management;

3. Increases the use of electronic communication, especially e-mail;

4. Supports small office/home office (SOHO) owners;

5. Promotes discounting for Internet-booked shipments;

6. Emphasizes the importance of customer relations management (CRM);

7. Pushes for more extensive use of wireless technologies to enlarge data outreach and speed communications;

8. Substitutes electronic transmission for the physical transportation of documents; and

9. Simplifies the comparison of carrier pricing and services.

E-commerce - The rapid expansion of e-commerce in the B-2-B and B-2-C sectors has introduced a new retail sales channel, but it has not yet substantially changed goods distribution. E-commerce has transformed the customer interface, reducing order costs by substituting electronic communication for phone orders and websites for catalogs.

E-communications - Greater use of electronic mail, standardization of document formats, higher standards of encryption (security), and signature recognition are adversely affecting paper-based mail, envelope and document services, and carriers who receive the bulk of their revenue from document delivery services.

Globalization - The lowering of tariffs and non-tariff barriers worldwide has hastened the push toward outsourcing, parts production, and distant assembly offshore -- especially in Mexico, China, Brazil, India and Southeast Asia. Supply chains have lengthened, so more emphasis has been placed on supply chain management (SCM) and efficient logistics.

Strategic Sourcing - The decision to shorten the list of suppliers and tie suppliers into longer-term contracts originally meant shrinking the number of carriers for each transportation mode. Now it may involve purchasing many services from a single supplier.

Labor Flexibility - Companies worldwide are seeking flexibility in the use of labor resources. The use of contract employees and the outsourcing of manufacturing illustrate how companies are attempting to maximize the flexibility of their labor resources. Competitors in the parcel industry operate under three sets of labor laws and employ union, non-union and contract employees. Labor agreements signed with the Postal Service and UPS have a historical basis from a time when competition was less intense. Changing agreements set in a more competitive environment will strain management skills, as illustrated in the automotive, steel and telecommunications industries.

Operating Flexibility - Companies in transportation are looking for ways to minimize the fixed nature of running a network operation. Both FedEx and Airborne have expanded their ground networks using contractors to deliver parcels and contract truckload carriers to haul freight between distribution hubs.

Market Outreach - Carriers are trying to satisfy a broader range of customer needs by expanding services nationwide, delivering to both business and residential addresses, offering services to the same shipper with different levels of time sensitivity, providing trade and trade financing services, and extending networks to customers requiring different methods of access such as retail stores and extensive pickup operations.

Specialization - This trend affects both the carriers and their customers. Corporate downsizing and divestiture have resulted in firms limiting the scope their activities to fewer core competencies. The specialization trend has encouraged the outsourcing of logistics function to third parties, including parcel carrier subsidiaries.

Specialization has also affected parcel carriers. Those with limited capital resources have reduced the scope of their business. For instance, the decision of Emery and Burlington Global to exit the parcel business illustrates how carriers with limited market presence can focus on their strengths; and in these cases larger shipments. Similarly, the decision of the Postal Service to focus on last mile, residential-delivery shipments originated by other carriers provides another example of specialization.

Demographics - There is a broad population shift in the U.S. toward the South and West as well as urban expansion beyond established suburbs. The first shift has caused carriers to restructure the relative size of their operations and orient delivery networks toward rapidly growing sections of the country. The shift to the exurbs reduces distribution network density, thereby increasing both pickup and delivery costs. These shifts may affect the relative advantages of established carriers that developed their networks prior to the more recent recent demographic shifts, because they may have assets that are poorly placed for the current marketplace. All demographic trends affect the capital and labor needs of the various competitors, favoring those competitors with the most flexibility. The Postal Service's expansion of its last mile services reduces the entry cost of carriers attempting to offer nationwide distribution.

Vertical and Horizontal Integration - Parcel carriers -- with the exception of the Postal Service -- have followed this trend. Vertical integration involves providing more of the activities associated with a particular transportation movement. This may include trade finances, logistics information systems, warehousing, call centers, etc. Horizontal integration involves offering a wider range of services using portions of the existing infrastructure. Examples of horizontal integration include the expansion of carriers from one speed of service to a full range of parcel transportation options.

Looking Toward The Future

The future of competition in the parcel market will depend on the following factors.

1. The financial crisis at the Postal Service. The Postal Service faces a severe cash crisis unless Congress changes its pension payment plan. In essence, the system will be substantially over-funded, a cost that will needlessly raise consumer costs and make the postal system less competitive. If a revised pension payment formula is approved, the Postal Service will likely delay raising postage rates until 2006, while its private sector carriers can be expected raise rates between 2.5 and 4% annually through this period.

Back-to-back increases in overnight and deferred air services (Express and Priority Mail) at rates two to three times greater than those of private sector competitors have resulted in double digit volume declines. As the Postal Service's prices rise customers have greater incentive to seek alternative services. The Postal Service is also pursuing a transformation plan as a means to make it through the current crisis.

2. The effectiveness of the Postal Service's network restructuring. The Postal Service is expected to announce a significant restructuring of its operating network in early 2003. The restructuring may close as many as 100 facilities and is expected to consolidate operations in facilities located close together. The restructuring will likely have up-front costs as some employees are offered early retirement or retraining into skilled positions. To the extent the Postal Service can reduce operating costs it could introduce new pricing pressure in the market. (Note 16)

3. Revision of the Postal Serviceís legislative and regulatory framework.  The Postal legislative and regulatory framework is currently under the review of a Presidential Commission.  This follows the efforts of Congressman John McHugh, who developed legislative proposals in the last Congress, and the Postal Service which suggested legislative changes as part of its Transformation Plan.  The Presidential Commission is expected to examine the roll of the USPS in the 21st century, examine the need for the Service to have flexibility to changes prices, control costs and adjust service levels in response to financial, competitive and market conditions; review unnecessary rigidity that impedes the services ability to perform; report on the ability over the long-term of the Service to maintain universal service at affordable rates and cover it unfunded liabilities with minimal taxpayer exposure; examine the extent to which monopoly restrictions advance public interests; and make recommendations with respect to governance and oversight. 

 

The Commissionís report is expected in the summer of 2003.  Congressional action on changes proposed will affect the continuing financial viability of the Postal Service and the future competitive structure of the parcel market.

4. Customer sophistication. By tracking performance of ground transportation, shippers have learned that higher priced air express and air deferred services do not necessarily offer better transit time. The slowdown in air services and the rapid growth of FedEx's and Airborne's ground services in 2001 and 2002 indicate that customers are shifting some business to lower-priced ground delivery. The decision of carriers to raise ground delivery prices more than air service charges in 2003 reflects how carriers have reacted to customer shipping decisions.

5. Success of the ground parcel investments of FedEx and Airborne. The early returns from FedEx's and Airborne's investments have provided these carriers with additional volume and allowed them to grow in a sluggish market.

6. Competitive moves by FedEx and UPS to introduce home and rural delivery surcharges on all services. The private-sector carriers have a competitive advantage over the Postal Service as long as they continue to charge different rates for higher-cost home and rural delivery and lower cost for business delivery points. The private carriers will continue their dominance of the B-2-B market as long as they charge lower rates and the Postal Service continues to charge the same rates to serve both B-2-B and B-2-C shippers.

7. Outcome of labor negotiations. Both UPS and the Postal Service have completed recent labor negotiations. UPS agreements increased salaries and benefits to industry-leading levels. Competitors that raise rates in lock-step with UPS may see improvements in profitability if their unit labor costs are lower.

The Postal Service has completed negotiations extending contracts with its major unions prior to an expected reorganization of its network. The new agreements continue cost-of-living adjustments and "no lay-off" clauses, but indicate that the Postal Service will use early retirement and retraining incentives to reduce work force levels in 2003 and beyond. These new contracts ensure that postal workers are paid higher wages than workers for all carriers except UPS.

8. Shifts in DHL's competitive position. DHL is not a significant competitor in the United States domestic market, but in international express between the United States and the rest of the world and it has about 37% of the delivery business. DHL is also the dominant express carrier for intra-Asia traffic outside of the United States.

DHL's larger U.S. competitors have tried to restrict DHL's actions in United States and international markets. DHL management needs to determine how it can best thwart this competition and establish a United States presence to complement its international strengths.

The recent reorganization of Deutsche Post's express and parcel delivery subsidiaries increases the possibility that DHL could become a substantial player in the United States market. DHL, now with responsibility for managing Deutsche Post's parcel and express business worldwide, is the largest courier, express and parcel courier firm in Europe with a combined marketshare of 16%. The recent purchase of Loomis in Canada raises its marketshare there to around 10% and gives it opportunities for more cross-border business. DHL has just begun to investigate the development of ground parcel delivery services. Given the success that Airborne and FedEx have had with their ground parcel delivery investments, DHL may have opportunities to profitably offer a fuller range of services to its customers.

9. Investment outside of the domestic United States parcel business. All of the private sector carriers are diversifying into international transportation, customs brokerage, ground transportation, supply chain management software, warehousing, financial packaging and logistics management to diversify risk and lock customers into a complete system of distribution and deliveries. Many of these adjacent areas are in fractured markets where no single competitor has marketshares as large as UPS or FedEx have in their core markets.

Until the first quarter of 2001, international air delivery volumes were growing three-to-four times faster than United States domestic volumes. International air service offers higher growth and net earnings potentials, plus economies of scale and scope when linked to United States domestic distribution networks of Airborne, FedEx and UPS. After a year of sluggish growth, international volumes picked up again substantially in the second half of  2002.

10. Carriers that make substantial investments outside of their core markets must not disappoint investors. Start-up costs can be substantial and companies without sufficient cash or profits face limited options. Furthermore, profits in the adjacent markets are often smaller unless substantial synergies with existing business can be developed. To date, the most profitable expansions have been made by FedEx in its ground delivery service and UPS by its foray into mail collection and sortation. In the future, UPS faces the greatest challenge here as few transportation-related businesses match the profitability of its core parcel services.

11. Government involvement in the market. The future of competition will clearly be affected by Postal Rate Commission decisions concerning the Postal Service and therefore all competitors. In particular, the introduction of contract rates or negotiated service agreements (NSAs) for parcel services are more likely to start if the proposed NSA with Capital One is approved and recommended by the Postal Rate Commission, a matter under review as of early December, 2002.

12. An adverse review of DHL licenses by the United States Department of Transportation could constrain DHL's ability to compete in the U.S. market. Also negotiations with the European community regarding access to both European and United States markets by cargo and passenger carriers could affect how U.S. and foreign carriers integrate parcel services that require air transportation.

13. Homeland security will affect carrier operations. In particular, carriers handling international and domestic shipments will need to adjust their operations to meet increased security demands.


IV. Conclusion

Currently the strongest competitor in the United States parcel delivery market is UPS. UPS dominates the largest sub-market, ground parcels over 2 pounds, by a larger margin than any other carrier dominates its strongest markets. UPS is also a serious competitor in many other parcel sub-markets. UPS generates profits far greater than those of any of its competitors and has the strongest financial position. It also has more free cash flow than competitors as well as a top credit standing.

UPS became the strongest carrier through a combination of effective labor and capital management and its attention to government policy. It is the pricing leader, with other private carriers announcing price changes after UPS. Alternatively, the greatest potential threats to UPS's competitive position are carriers offering similar services at less cost.

UPS faces two significant challenges. First, operating efficiency is important to hold down labor costs. Second, to grow UPS must find new customers and product lines.

In contrast to UPS's need to protect its dominant position, all other carriers are defending specific market niches and looking for means to profitably challenge UPS's dominance.

FedEx holds a powerful competitive position in the overnight document delivery market and is a strong competitor in other overnight markets. FedEx has made substantial investments to expand its portfolio of transportation services and is now the largest non-union transportation company in the United States. FedEx has substantially more labor flexibility than UPS.

This flexibility combined with increasing economies-of-scale should improve the profitability of FedEx's transportation investments, its ground parcel service in particular. FedEx's announced investments indicate that it expects to continue to grow its ground parcel delivery business at double-digit rates over the next few years. If FedEx's ground and air businesses continue grow at projected rates, FedEx's ground delivery business will soon be larger in shipment volume if not in revenue than its Express business.

Airborne remains a serious-but-small competitor with a focus on customers seeking lower-priced shipping options. It has made a significant decision to expand beyond its core overnight letter and small parcel business. The long-term future of its business will depend on the growth and profitability of its airborne@home and Airborne Ground businesses and the impact these products have on its critical overnight delivery markets. In 2001 and 2002, Airborne's results from these products exceeded expectations and now represent more than 10% of Airborne's shipping volume. Airborne is helped by a more flexible labor environment than UPS and FedEx because it uses contract drivers for most of its deliveries.

DHL is an enigma in the U.S. market. Its small domestic marketshare indicates that it is not a significant option for most customers needing overnight parcel and document delivery services. DHL needs a stronger domestic United States network to serve shippers from overseas who need delivery in the U.S. DHL also must fill planes heading in the opposite direction. Given DHL's small size, investing in the United States market will require both imagination and capital.

The recent restructuring that transferred Deutsche Post's parcel and logistics operations to DHL creates an entity with a service portfolio more in line with what is currently offered by UPS and FedEx, but with strength in Europe and Asia rather than in North America. However, DHL's purchase of Loomis in Canada gives it a larger presence in North America, though not yet in the United States.

DHL's association with Deutsche Post falsely suggests that it can obtain unlimited financial resources to expand its U.S. business. In fact, regulatory restrictions prevent Deutsche Post from investing profits from its mail business in the United States, but private-sector profits from other operations are not so encumbered. The association DHL carries with Deutsche Post also creates political difficulties. It encourages competitors to challenge DHL's U.S. operating authority.

The Postal Service differs from UPS's private-sector challengers in that it faces its future with a weak financial position plus threats to its core letter delivery business. In addition, the Postal Service faces substantial unfunded liabilities for retiree benefits and workers compensation that other carriers do not have. While the Office of Personnel Management has proposed a solution to reduce its unfunded liabilities, the measure has not passed in Congress as of this writing.

The Postal Service must effectively manage costs to keep its mail and parcel products price competitive. At the same time, it needs to find sufficient capital to ensure that its services can be integrated into customer supply chains and to quickly streamline operations.

The Postal Service faces its future with some strength. It still has an advantage in home delivery, and -- in particular -- the home-delivery of small parcels. While FedEx has increased its home delivery business rapidly, the Postal Service should continue to have a cost advantage over private-sector carriers as long as it can deliver parcels with regular mail. In addition, actions taken by the Postal Service as part of its transformation plan have shown that its business can be more effectively managed. In particular, careful attention to cost control has already produced real savings without causing service deterioration.

In addition to these challenges, the future of the Postal Service depends on the actions of its private sector partners and Congress. Parcel consolidators have made substantial investments in transportation networks and sortation centers while the Postal Service has not because of limited capital resources. Such continued investment could expand the competitiveness of Postal Service's last mile delivery service.

Congress continues to examine the possibility of postal reform, a Presidential Commission has been formed, and new legislation may be introduced in the next Congress. Both the Postal Service's transformation plan and a change in pension plan contributions require Congressional approval. Should Congress act, the Postal Service's position could change and with it the economics and competitiveness throughout the parcel industry.


Appendix A: Airborne  (http://www.airborne.com )

Corporate Overview

Airborne Express is the fourth-largest parcel carrier, and the third-largest publicly-traded air express carrier in the U.S. Airborne traces its origin back 50 years when its predecessor firm began flying fresh flowers from Hawaii to the mainland. Airborne has existed as a nationwide air express carrier since 1979 and now provides services in over 200 countries.

Airborne operates three subsidiaries in addition to the parent company. ABX Air manages the transportation and logistics operations necessary to support Airborne Express's services. Sky Courier runs Airborne's urgent freight operations as well as Airborne's International Field Stock Exchange Centers. These centers provide urgent delivery for spare parts and other items that client field operations may require. Airborne Logistics Services provides warehousing and distribution services in the U.S. and internationally.

Traditionally, Airborne targeted larger corporate customers rather than smaller shippers, although it has recently expanded its ability to serve retail customers. In 2001, Airborne earned $2.9 billion in revenue on its U.S. domestic business, handling 322.9 million shipments.

Services

Airborne offers the time-sensitive delivery of documents, letters, small packages and freight to virtually every U.S. ZIP code as well as more than 200 countries. Airborne provides a full range of express and ground delivery services in the U.S. For overnight delivery, Airborne offers early morning, noon and late afternoon delivery. Airborne offers second-day air delivery service nationwide. Airborne introduced ground delivery service early in 2001 and it represented 8.6% of shipments and 5.5% of revenue by the second quarter of 2002.

Airborne provides international services in conjunction with partners and has achieved significant market coverage internationally. Those services are marketed in the U.S. under Airborne's name and overseas under the foreign carrier's name. The most extensive partnership is with Purolator of Canada. Airborne uses Purolator to deliver shipments in Canada and Purolator markets a full line of cross-border air and ground parcel delivery services with Airborne providing the U.S. transportation and delivery.

Airborne offers nationwide pickup services. Airborne's small business document service employs an extensive network of drop boxes in urban areas. Airborne has also teamed up with printer franchises Sir Speedy and PIP that allows small- and medium-sized clients to manage their printing and shipping needs.

Airborne offers both business and residential delivery. Airborne's business deliveries are handled internally. Most residential deliveries are provided in conjunction with the Postal Service through a product called airborne@home. Airborne@home, first offered in 1999, involves Airborne collecting, sorting and transporting parcels to a point close to the final destination where the parcels are transferred to the Postal Service for delivery. Airborne@home offers a parcel delivery service with transit times between deferred air and ground services available through the various parcel carriers. Airborne pays the Postal Service published destination entry rates for delivery.

Finally, Airborne has offered logistic services since 1993. Airborne Logistics Services provides air and ocean freight forwarding, warehousing and supply chain management. Airborne's Logistics Services targets large corporate clients with significant small package air transportation needs.

Operating Characteristics

Airborne uses a hub-and-spoke system with its primary hub located at the Airpark airport in Wilmington (OH). Regional sorts take place at Allentown (PA), Atlanta (GA), Columbia (MO), Fresno (CA), Orlando (FL), Providence (RI), Roanoke (VA.), South Bend (IN) and Waco (TX).

The ABX Air cargo fleet, because it does not have special cargo doors, uses a special "C- container" which allows a maximum number of packages to be loaded into the cabin volume, while being easily moved through standard passenger doorways. ABX Air has 74 DC-9's; 24 DC-8's; and 20 B-767, plus a further 70 aircraft that it charters. (Note 17)

Airborne Express offers pickup and delivery with nearly 15,000 delivery vans and trucks, primarily a contractor-provided fleet. Only 6,000 of Airborne's delivery vans and trucks are company owned. Airborne employees are organized by the International Brotherhood of Teamsters. Contractor employees are not unionized.

Retail Network

The Airborne retail network is limited to its distribution depots. Customers can access the Airborne network by using the numerous drop boxes located in major metropolitan areas. In December 2001, Airborne signed an agreement with Office Max to estab

lish retail outlets in each of Office Max's stores. This retail network was expanded to 940 Office Max stores in the fall of 2002. (Note 18) In addition, Airborne's services are available at 1,700 Neighborhood Postal Center locations.

Labor Issues

Airborne uses a combination of union, non-union and contract employees to provide its services. Airborne has at least 9,000 pilots and drivers organized by the Teamsters. Airborne's employees at its hub locations are mostly non-union.

Airborne over-the-road drivers are subject to the National Motor Freight Agreement (NMFA) between the International Brotherhood of Teamsters and the Motor Freight Carriers Association. (Note 19) The most recent contract was signed in March of 2001 and will last for two years. (Note 20) The contract allows Airborne to hire new drivers at $13.41 per hour and progress to the top NMFA rate. Airborne's unionized drivers work primarily in larger cities and constitute about half of its pickup and delivery employees. (Note 21) The Teamsters expect that the expansion of Airborne's over-the-road network will increase the need for unionized drivers.

Contractors staff most of Airborne's pickup and delivery operations. The contractors often manage a fleet of pickup and delivery trucks and drivers with a focus on a limited geographic area. The contractor's drivers may be employees of the individual firm or contract workers.

Recent Developments

Over the past two years, Airborne has managed to transform itself from an air courier company focused on overnight shipments into a broader line, small parcel carrier. The newest lines of business, Airborne Ground and airborne@home, now represent nearly 10.2% of Airborne's revenue as of the second quarter of 2002. Ground deliveries have gone from 0 to 10% of shipments in less than a year giving Airborne a more balanced mix of overnight, two-day air and ground shipments than it had as recently as 2000.

Additionally, Airborne has recently gone through significant economic and management challenges. The economic slowdown, which reduced demand for express services, put pressure on Airborne's profitability. In response, Airborne implemented cost controls, used industrial engineering studies to improve cost management, and expanded Airborne Ground to increase revenue. (Note 22) Finally, Airborne went through a change in senior management as its leaders of nearly a quarter century retired. (Note 23)


Appendix B: BAX Global  (http://www.baxworld.com )

Corporate Overview

BAX Global is a subsidiary of The Pittston Brinks Group (NYSE:PZB), a $4 billion transport, security and natural resources company. Based in Irvine (CA), BAX Global has 10,000 employees worldwide and operates 155 offices in the U.S.

BAX Global began as Burlington Northern Air Freight in 1972 offering air forwarder services for heavy weight air cargo. In 1980, Burlington added small package overnight services. The Pittston Company acquired Burlington in 1982. In the early 1990's BAX Global changed its focus to providing global logistics services and developed significant operations in Asia and Europe. At about the same time, BAX Global abandoned parcel delivery.

BAX Global concentrates on serving business customers with large shipments and significant supply chain management needs, especially in computers and electronic equipment. It usually carries higher volumes in March, June and August through December. BAX Global earned $1.8 billion worldwide in 2001 providing global transportation and supply chain management services. BAX Global customers include automotive, aerospace, computer, electronics, fashion retail and rapid-delivery, high-value shipments from both large and small clients.

Services

In North America, BAX Global offers three products: guaranteed overnight, second day delivery, and BAX Saver -- delivery within 1 to 3 business days. While BAX Global can handle parcel shipments, its primary business is transportation and supply chain services for large industrial clients. Most BAX Global shipments weigh over 10 pounds, and many weigh thousands of pounds. BAX Global does not offer home delivery or have the capability of sorting letters and envelopes.

BAX Global offers a full range of supply chain management services including transportation, materials and warehouse management. As a full service forwarder, BAX Global offers both air and ocean forwarding for international shipments.

With a focus on large industrial customers and larger shipments, BAX Global has no retail presence.

Operating Characteristics

BAX Global acquired Air Transport International (ATI) in 1998. ATI provides North America lift service to BAX Global, plus domestic and international lift service for the U.S. Government Air Mobility Command and other charter customers. BAX Global (including ATI) had 23 leased/contract aircraft operating in North America from a sorting hub in Toledo (OH). In addition to its primary hub, BAX Global operates regional hubs in Atlanta (GA), Chicago (IL), Dallas (TX), Los Angeles (CA), Miami (FL), Newark (NJ), Seattle (WA), and San Francisco (CA).

The BAX Global (including ATI) airfleet included 16 DC-8's and nine Boeing 727's in 1999. Of these planes, 18 were used in regularly scheduled service with a nightly lift capacity of 1.1 million pounds. In addition to its operated and contracted air fleet. For its lower-cost BAX Saver service, BAX Global has an extensive fleet of trucks and delivery vans.

Labor Issues

Bax Global and its subsidiaries have more than 10,000 employees worldwide. Of these, only 100 customer service, clerical and/or dock workers in the U.S. are represented by a union, primarily the International Brotherhood of Teamsters.

Recent Developments

In response to the slowdown in air freight and substantial operating losses, BAX Global reduced its air fleet by 14 aircraft fleet at the beginning of 2000. The downsizing of the fleet along with other cost control measures has allowed BAX Global to return to profitability after difficult years in 2000 and 2001.


Appendix C: DHL (http://www.dhl.com/main_index.html)

Corporate Overview 

DHL is a 42-year-old company founded in the US.  It offers worldwide express and parcel services through a group of related companies. DHL International, Ltd. is headquartered in Belgium and Deutsche Post World Net recently acquired all of its shares.  DHL Worldwide Express, Inc. is headquartered in the U.S. and provides service in the U.S. and between the U.S. and other countries.  DHL Airways is a US-owned and US-controlled air carrier providing air carrier services to DHL Worldwide Express, and in addition it furnishes air services for the US military among other customers within the U.S. and between the U.S. and other countries. 

The international delivery of parcels and documents is at the center of DHL's activities. DHL's strength is its network in Asia and Africa, a network which is more extensive than those operated by competitors. In the U.S., DHL Worldwide Express offers services to more than 42,000 major business centers. (Note 24)  Internationally,  DHL Worldwide Express earned under $6 billion (6.3 billion Euro) in revenues in 2001. DHL Worldwide Expressí revenues in the U.S. were under $600 million. (Note 25) 

DHL Airways is a separate company from DHL Worldwide Express with 75% of the voting interest held by U.S. citizens and 55% of the total equity under U.S. ownership.  DHL Worldwide Express sees the U.S. express business as 40% of the global market, and has recognized that DHL Worldwide Express needs a larger share of the U.S. marketplace to complement its international activities. 

Services

 In the U.S., DHL Worldwide Express offers express services catering to time-sensitive shippers. DHL Worldwide Expressí primary U.S product, USA Overnight, offers next day delivery by noon with most deliveries provided by 10:30 AM.  DHL Worldwide Express also offers urgent delivery services, including air charters. DHL Worldwide Express has just begun to offer ground delivery service.   DHL Worldwide Express provides a number of optional services at additional cost, including Saturday, Sunday and holiday delivery, collect billing, insurance, and temperature controlled operations.

 Operating Characteristics

 DHL Worldwide Express, using lift provided by DHL Airways, operates domestic services through its centralized hub at the Cincinnati Airport (CVG), located in Covington (KY).  A modern expanded air cargo terminal will be opened in 2003.  DHL Airways employs 1,900 workers, including 960 full-time workers and pilots.

In total, Deutsche Post World Net has more than 16,000 workers in the U.S., about 10,000 of whom are employed by DHL Worldwide Express.  DHL Airways had 33 jets in service as of the second quarter in 2001. DHL's hub has the ability to handle 62 planes.

Retail Network

To serve retail customers, DHL Worldwide Express operates a limited number of DHL Express Centers and Service Centers, and it has drop boxes located around major urban centers.

Labor Characteristics

The Airline Pilots Association organizes DHL Airways pilots. DHL hub employees and pickup and delivery drivers are either non- union employees or contractors. DHL dispatchers are members of the International Brotherhood of Teamsters.

Recent Developments

In 2002, Deutsche Post World Net completed the 100 % acquisition of DHL Worldwide Express.  The purchase of the controlling interest in DHL has resulted in renewed challenges in the US by UPS and FedEx regarding DHL Worldwide Express'  freight forwarding license and DHL Airways air carrier license.  To date, DHL Worldwide Express and DHL Airways have successfully rebuffed challenges to its operating licenses.

In May 2001, the U.S. Department of Transportation officially rejected petitions from UPS and FedEx and reconfirmed the previously granted freight forwarding license for DHL Worldwide Express.  In denying these complaints, US DOT noted that foreign companies may be licensed as freight forwarders in both domestic and international air transport, and that there was no evidence of unfair competition in the US market

by any DHL company.  The Department of Transportation in early 2002 also notified DHL Airways that it fulfills all requirements as a genuine US citizenship air cargo carrier.  


Appendix D: Emery Worldwide (http://www.emeryworldwide.com)

Corporate Overview

Emery Worldwide is the air freight subsidiary of CNF Inc. Emery Worldwide operates as an air freight forwarder. Prior to December, 2001, Emery also operated as an airline which was the oldest air cargo carrier in the U.S. until it closed.

CNF Inc. is a $6 billion management company (NYSE:CNF) offering global supply chain solutions, with businesses in regional trucking, air freight, ocean freight, customs brokerage, and global logistics management. CNF now operates with two subsidiaries, Menlo Worldwide and Con-Way Transportation. Emery Worldwide is a division of Menlo Worldwide.

Prior to December 2001, Emery provided services through two corporate entities. Emery Worldwide operated as an air freight forwarder with a principal hub at Dayton (OH). This hub is linked to eight international gateways, numerous regional sort hubs in the US and Canada, plus more than 600 delivery nodes. Emery operates in 229 countries using a network of more than 500 service centers and agent offices. Emery World Airways operated the aircraft and sortation hub. Since the closing of the airline in December 2001, Emery operates only as a non-asset based freight forwarder.

Emery Worldwide is the successor to three separate air freight and express operations once owned by CNF Corporation, CF Airfreight, Emery Airfreight, and Purolator Express. CF Airfreight was founded in 1970 as a domestic air freight forwarder and carrier. Emery Airfreight was founded in 1946 and purchased by CNF in 1989 for $230 million. Purolator, which provided express and parcel delivery services, was purchased by Emery in 1987 for $300 million and became a CNF subsidiary. (Note 26) Upon Emery's purchase, CNF merged its CF Airfreight with Emery's operations but continued to run Purolator separately.

At the time of its purchase by CNF, Emery was in poor financial health. It had generated substantial losses in both 1987 and 1988 and continued to generate losses once purchased by CNF. To stem the losses, CNF took a number of steps that moved Emery out of the parcel business. First, it closed Purolator in 1990. In 1992, the company exited the express business under the Emery name. Emery exited the small parcel business shortly thereafter.

In 2001, Emery Worldwide generated $2.04 billion in revenue. This included $144 million in business with the Postal Service which was discontinued that year.

Services

Emery is based in Redwood City (CA), and offers air and ocean transportation, logistics and brokerage to manufacturing, industrial, retail and government customers. Emery provides overnight air freight forwarder services, it primarily markets two- to three-day services to its customers and it specializes in time-definite transport services for business-to-business shippers of heavyweight cargo. Its usual clients include manufacturers, industrial, retail and government clients. Emery seeks to provide comprehensive next-day, heavy-freight coverage throughout the USA as well as a domestic and international freight forwarder service with operations in more than 200 countries.

Prior to the restructuring in 2001, Emery managed several large-scale import/export logistics operations in Europe and Asia. These often involved carrying shipments from the US to offshore warehouses, "pick and pack", and then distributing them. Emery deals with customs, value-added taxes, language requirements and the like with competitively-priced services. Now these services are operating under the Menlo Worldwide Logistics division of Menlo Worldwide.

Menlo Worldwide Logistics provides logistics services including warehousing and supply chain management. Menlo Worldwide Logistics combines the logistics services that CNF had run under the Menlo, Emery and Con-Way brand names.

CNF offers other freight and logistics services through its Con-Way subsidiary. Con-Way Transportation Services has three regional, less-than-truckload subsidiaries in the U.S. and one in Canada, a truckload carrier, and an expedited trucking service, Con-Way Now. Con-Way also manages a non-asset based air freight forwarder, Con-Way Air, as well.

In addition to its commercial air freight business, Emery has had a long-standing contract business providing the lift and sortation for the Postal Service Express Mail product. As CF Airfreight, the company began providing lift for the Postal Service in 1982 and signed it first substantial contract in 1985. Emery continued to provide airlift services for Express Mail through 2001. Emery was awarded a contract to provide transportation and sortation services of Priority Mail in 1997 and continued to provide that service for the Postal Service until 2000.

Operating Network

Prior to CNF's decision to close Emery Air on December 5, 2001, Emery operated an airline through its Emery Air subsidiary, an air distribution hub, and a ground pickup and delivery network. Emery Air had a fleet of Boeing-727 and DC-8 freighters supplemented locally by Piper Cubs and AN-124's. This airline had a hub in Dayton (OH) and that served Emery's 150 service locations within the U.S. The Airline generated $226 million in cargo and $279 million in operating revenue in 2001.

Since August 2001, Emery has used a contracted aircraft fleet for its domestic freight service. Emery's primary suppliers are Ryan Aviation, which operates a Boeing 727 fleet for Emery, and Express Net, which has an Airbus A300 fleet. The contractor fleet had 34 aircraft prior to 2002. Emery continues to use its Dayton hub to transfer cargo between contractor planes. (Note 27)

Emery and USPS

Emery provided transportation services to the Postal Service beginning in 1982. In 1991, contracts were awarded to other carriers and Emery sued to abrogate the awards. During the litigation, Emery's prior service contracts were continued. Emery was awarded a contract for the air service in 1993.

Emery's contract providing transportation and sortation services for Priority Mail was also subject to litigation over the actual charges due from the Postal Service. Upon the conclusion of this litigation in the third quarter of 2000, Emery received a summary judgment requiring the Postal Service to increase its payments to Emery for Priority Mail sortation services rendered between 1998 and 2000. As part of the settlement, the Postal Service made a provisional payment of $100 million. The final settlement amount has not been determined.

In 2001, the Postal Service decided to switch its carrier of Express Mail from Emery to FedEx. Emery contested this decision and in 2001 the US Court of Federal Claims denied Emery a temporary restraining order barring the Postal Service from signing a sole source contract with FedEx. The relationship officially concluded in August 2001 and Emery now is litigating a termination settlement of its air transportation contract with the Postal Service.

Recent Developments

Emery is currently adjusting to difficult economic and competitive trends as well as the transformation of its company. The decline in the high tech and telecommunications industries has reduced the demand for heavy weight air service. Guaranteed delivery services offered by truckload and less-than-truckload carriers have increased competition for expedited services. Finally, management has just completed the transformation of Emery from a company that operates both as a freight forwarder and as an air carrier to one that only provides freight forwarder operations.


Appendix E: FedEx  (http://www.fedex.com )

Corporate Overview

FedEx is a global provider of transportation, logistics, e-commerce and supply chain management services. FedEx offers its services through a network of subsidiaries including FedEx Express; FedEx Ground; FedEx Freight; FedEx Global Logistics; FedEx Custom Critical and FedEx Trade Networks. Total FedEx group revenue in fiscal year 2001 reached $19.6 billion.

FedEx Express is the largest transporter of time-sensitive air letters, documents and packages in the US domestic market. FedEx Ground is North America's second-largest provider of small-package ground delivery services. FedEx Freight provides regional, less-than-truckload freight transportation (500 to 10,000 lb. shipments). FedEx Global Logistics is an integrated logistics, technology and transportation-solutions company. FedEx Custom Critical provides urgent freight shipment in the U.S. FedEx Trade Networks provides customs brokerage, consulting, information technology and trade facilitation services.

FedEx's parcel delivery services are provided independently by its FedEx Express and FedEx Ground subsidiaries. Delivery to households is provided by FedEx Home Delivery, a division of FedEx Ground.

FedEx was founded in 1971 and began its express delivery of parcels and documents in 1973. FedEx expanded internationally into Canada in 1981, and then into Europe and Asia with the purchase of Gelco Express in 1984. FedEx further expanded its international business with the purchase of Flying Tiger's network to 21 countries in 1989, and the Evergreen International Airline route authority to China in 1995.

FedEx Ground was founded by Roadway Services as Roadway Package System (RPS) in 1985. RPS expanded throughout North America in the 1980's and 1990's until it achieved full coverage in 1996. In 1998 FedEx Corporation acquired RPS along with Viking Freight, Caliber Logistics (now known as FedEx Supply Chain Solutions) and Roberts Express (now known as FedEx Custom Critical) in the purchase of Caliber System, Inc. RPS was renamed FedEx Ground in 2000.

Services

FedEx offers a full range of parcel delivery services in the U.S. FedEx Express offers early morning, morning, and next afternoon plus two-day and three-day delivery of parcels up to 150 pounds to all points in the U.S. FedEx Express provides both business and residential delivery.

FedEx Ground offers deferred ground delivery of parcels to all business addresses in the U.S. and nearly all residential addresses. FedEx Ground provides home delivery through both its Ground and Home Delivery networks. The Home Delivery network offers more flexible delivery options than standard FedEx Ground delivery service. The flexibility includes evening and weekend deliveries using FedEx Home Delivery drivers.

All FedEx Express and Ground services include, as part of the service, a guarantee offering refund of the transportation charge if service is not provided as promised. FedEx offers additional services such as insurance, C.O.D., and the handling of hazardous and medical shipments.

FedEx Express and Ground both provide pickup service as part of the standard offering. FedEx Express provides discounts for packages dropped at FedEx counters and drop boxes.

Network Operations

FedEx is unique among its competitors in that it operates its Express and Ground delivery networks independently. Therefore, FedEx has separate pickup, linehaul (city-to-city) and delivery networks for shipments tendered to FedEx Ground and FedEx Express. FedEx Ground and FedEx Express share the same retail network of FedEx customer counters.

Air Network

FedEx Express has a fleet of 653 aircraft. This is the world's second-largest air fleet. FedEx's primary hub is in Memphis (TN) and regional hubs are in Anchorage (AK); Dallas-Ft. Worth (TX); Indianapolis, (IN); Oakland, (CA); and Newark, (NJ). Its international hubs are in Hong Kong, China; Brussels, Belgium; Miami (FL); and Toronto, Canada. FedEx Express uses its transport system to handle more than three million packages and over six million pounds of freight daily. FedEx's Air network includes significant numbers of over-the-road trucks for short-haul express and second-day air shipment

Ground and Delivery Networks

FedEx Express employs over-the-road trucks to haul express and second-day air shipments traveling short distances. FedEx Ground employs a separate ground network for its linehaul transportation between its distribution hubs. All told, FedEx Express operates 44,500 motorized vehicles to handle linehaul and delivery. FedEx Ground has more than 13,000 vehicles for operations that include the linehaul and the two delivery networks.

Retail Network

FedEx provides network access to retail customers in four ways.

Labor Characteristics

FedEx operates with a combination of unionized and non-unionized employees and contractors. FedEx Express is subject to Railway Labor Act as an air express carrier. FedEx Express pilots are organized. FedEx Express drivers and sortation employees are non-union.

FedEx Ground employs both non-union employees and contractors. In 2001 the US National Labor Relations Board ruled that FDX Ground was subject to the National Labor Relations Act (NLRA) as a trucking company, and could therefore be organized piece-by-piece by the Teamsters who sought the ruling. Prior to the ruling, FedEx Ground contended that its operations were part of an express carrier, FedEx Express, and fell under the Railway Labor Act which would have required the Teamsters to organize the entire company's employees in one effort.

FedEx and USPS

FedEx and USPS have agreed to two, seven-year contracts. The first involves air transportation for the Postal Service's Express, Priority and First Class mail. The second contract allows FedEx to place self-service, FedEx Express drop boxes outside Postal Service locations. Both agreements were reached in January 2001, and implemented in the summer of 2001.

FedEx launched its Postal Service air transportation service in August 2001. Under the original contract, FedEx expected that as much as 3.3 million pounds of mail -- enough to fill 30 DC-10 freighters -- would flow through it Memphis hub.

Due to restrictions on the transport of mail by passenger carriers since September 11th, the Postal Service has exceeded all minimums required under its FedEx contract. FedEx and the Postal Service have signed a contract amendment to accommodate the additional volume. The contract amendments now run through May 2003.

The contract to locate drop boxes at Post Offices will cost FedEx between $126 million and $232 million over seven years. FedEx plans to place its drop boxes in 10,000 USPS locations and believes these boxes can generate an additional $900 million for it over the life of the contract.

FedEx now carries about half the mail that used to be handled by passenger carriers. This volume came at a time when air freight from other customers was declining. The postal volume had the effect of more than doubling the air freight that FedEx carries within the U.S.

Recent Developments

For the past two years, FedEx has dealt with a two key trends that have hurt its Express business. First, the continuing acceptance of electronic documents has reduced the overnight envelope business that FedEx created nearly two decades ago. About one-quarter of FedEx overnight business -- 750,000 items -- are letter-sized envelopes. Add in legal briefs, contracts, manuscripts plus other documents and the total makes up about two-fifths of FedEx overnight traffic.

Second, the manufacturing recession produced declines in domestic and international express parcel volumes from expected levels. The decline in domestic and international freight appears to have stopped by the third quarter of 2002.

These adverse trends caused FedEx to take significant efforts to control costs. FedEx stopped its employee profit-sharing benefits indefinitely. FedEx suspended training, travel and discretionary meetings, and froze hiring in all but critical areas such as aircraft maintenance, sales and marketing. FedEx also reduced capital spending. The improved financial performance through the end of FedEx's fiscal 2002 and the beginning of 2003 may allow FedEx to make investments that were held off in 2001 and early 2002.

At the same time as FedEx's express business was slowing, FedEx invested heavily in FedEx Ground, information systems and its sales force. FedEx services were all re-branded with a "FedEx" name. Sales forces were expanded to allow for increased selling efforts to small- and medium-sized shippers and trained to cross sell the various FedEx brands. These actions had a strong positive effect on the growth of FedEx Ground over the past two years.

FedEx has just begun two significant capital expansions in the U.S. FedEx plans to spend $1.8 billion over the next six years in an effort to nearly double the daily package volume handled by FedEx Ground. The expansion will add 10 new and 23 expanded central distribution hubs, while expanding or relocating more than 300 existing facilities. (Note 28) FedEx Express has also signed a lease on a new hub at the Greensboro (NC) Airport. The Greensboro hub is expected to open in 2007 (Note 29)


Appendix F: UPS  (http://www.ups.com )

Corporate Overview

UPS is the largest parcel carrier in the world. UPS is largest both in terms of revenue and profits generated by the parcel business. Its brown vans are ubiquitous on streets in the U.S. and around the world. UPS claims to have handled over half of all online purchases in 2000.

In 2001, UPS's domestic U.S. parcel business earned revenues of $23.997 billion from a delivery volume of 3.1 billion packages and documents. On a daily basis UPS handles 12.3 million domestic shipments.

UPS's total revenue in 2001 was $30.6 billion. Its total operating income in 2001 was $3.9 billion, with 91% of its profit coming from its U.S. domestic business. It's net income in 2001 was $2.4 billion.

UPS was founded in 1907 in Seattle, Washington and in its early years it prospered by providing home delivery for department stores. Since nearly its inception, UPS has consolidated parcels from multiple shippers onto a single delivery vehicle. In the 1930's, UPS expanded its store delivery service into the East Coast and Midwest U.S. (Note 30)

UPS began providing common carrier services in the 1950's, when it received Interstate Commerce Commission (ICC) authority to transport parcels throughout much of the U.S. The ICC granted UPS the authority to transport parcels between all states in the continental U.S. in 1975. UPS began providing parcel delivery service between all points in the U.S. following the preemption of state regulation in the early 1990's.

UPS has offered air express service since 1929, but really entered the air express and parcel delivery business in 1982 with the establishment of its UPS Next Day air service. In 1988, UPS expanded its involvement in air express and parcel delivery with the establishment of an airline. UPS Airlines now provides air service between the U.S., Europe and Asia with major hubs in the Philippines and Germany. Its most recent expansion has been the creation of a direct U.S.-to-China service. In 1975, UPS began service in Canada, followed a year later with the delivery of parcels in Germany. UPS now serves more than 200 countries, both with service between countries and domestically within individual countries.

UPS Logistics provides worldwide supply chain management, service parts management, logistics information system and transportation network optimization services. Through UPS Capital Corp. and its First International Bancorp subsidiary, UPS offers trade-financing services. UPS's financial arm is now the eighth largest originator of Small Business Administration loans, making it a significant player in small business financing. UPS provides customs brokerage as well as ocean and air freight forwarding through UPS Custom Brokerage and the recently-purchased Fritz Company. Overseas Partners, Ltd., a company spun off to UPS shareholders, provides parcel insurance services to shippers.

UPS's involvement in document delivery beyond overnight express services began in 1998 with the introduction of UPS Document Exchange, the first encrypted digital delivery service. In 2001, UPS made a number of acquisitions that expanded its mail services. These included: Global Management Ltd., a company that transports flat-shaped mail (i.e. annual reports, catalogs, etc.) to Postal Service; Mail 2000, a company that provides hybrid mail through the electronic transmission of mail to printing plants close to the recipient's address; and Mail Boxes Etc., a company offering retail pickup and delivery services including box rentals, stamp sales, packing services, and parcel shipping. In 2001, UPS also introduced a new service where it collected mail for pre-sortation by contractors. This last service expanded the market for pre-sortation to mailers with fewer daily pieces than many pre-sortation firms can accept.

UPS is unique among the publicly-held parcel delivery carriers in that most stock is owned by employees and retirees. All UPS employees have had the option to purchase UPS stock since 1995. Previously, only management employees could buy shares outside of retirement accounts. Prior to UPS's public offering in 1999, UPS's stock price was set by a management committee.

Services

UPS provides a full range of express and ground parcel delivery services. UPS's Sonic Air subsidiary provides urgent, next-flight-out services. UPS Air provides air express service with early AM, next morning, next day, and two- and three-day service for envelopes and parcels up to 150 pounds. Ground delivery service provides between two- and five-day service for parcels up to 150 pounds. All of UPS's services include a guarantee that refunds transportation charges if the shipment does not arrive as promised. The service guarantee only applies to commercial deliveries.

UPS provides its air service throughout all points in the U.S. Ground delivery service is provided to all points in the continental U.S. and most addresses in Alaska and Hawaii. Both Air and Ground delivery services are available to commercial and residential addresses. UPS has surcharges for delivery to residential addresses and additional surcharges for rural residential delivery.

In addition to transportation services, UPS offers a full range of ancillary and special services that can be purchased for an additional fee. These services include cargo insurance, COD, Saturday delivery and pickup, and hazardous material transportation. All UPS parcels can be tracked and traced via the Internet or through a toll-free number, and delivery confirmation is available as well.

UPS customers can request parcel pickup through UPS's automated pickup system or by depositing parcels at one of thousands of drop off boxes or retail locations. UPS has an extensive retail network through company-owned storefronts, subsidiaries and strategic alliances with commercial mail receiving agents and retailers. UPS's extensive retail network allows it to offer reverse logistics services for the return of parcels and other items such as used laser toner cartridges.

UPS was the first parcel carrier to offer hundred-weight service. This service prices a multiple parcel shipment between the same origin and destination based on the total weight of the shipment rather than charging separately for each item. This innovation, later copied by its private sector competitors, allowed UPS to compete with less-than-truckload carriers for their minimum weight shipments.

In combination with other UPS subsidiaries, UPS bundles its parcel delivery services with call centers, warehousing, inventory management and spare-parts distribution. UPS's global reach allows it to cross-sell both domestic and international parcel services to the same customer.

UPS has used its extensive delivery network to create customer-specific services. For example, UPS provides a delivery service for Home Depot, allowing customers to order items from a nearby Home Depot stores for delivery by UPS. This program allows Home Depot to serve communities which are too small for a retail center.

Network Operations

UPS was one of the first companies to consolidate the delivery of parcels in the U.S. -- the company name actually arises from the fact that it provided the united delivery parcels from multiple shippers.

UPS operates a single delivery network for both its ground and air services and has done so since 1999. Each delivery driver handles up to 500 parcels. UPS's noted efficiency comes from its ability to load its trucks in delivery stop order. This loading method allows UPS to carry parcels with different delivery commitments on the same truck, make all commitments on time, and minimizing the driving time between stops.

UPS operates separate ground and air distribution networks to handle the transportation of parcels between cities. UPS has shifted significant portions of its short-distance overnight and deferred air inter-city transportation to truck transportation. This allows UPS to move deferred air shipments up to 700 miles by truck.

Ground Network

UPS operates 185,000+ trucks in its ground network. This fleet includes the well-known brown delivery vehicles, and a fleet of larger vehicles for transporting parcels between major sortation hubs. During its peak period it leases additional trucks. UPS makes extensive use of industrial engineering studies to continuously optimize its network and the efforts of each employee.

UPS's ground network can be divided into four distinct operations: pickup, sortation, linehaul or feeder service, and delivery. UPS ground pickup and delivery networks provide the ground transportation necessary for handling air shipments.

UPS uses its vans to make regularly scheduled pickups in the afternoon after completing morning deliveries. UPS leaves tractor-trailer vans for pickup at larger customer sites. On-demand pickup is available via phone and the Internet. UPS's information system allows dispatchers to direct pickups to the nearest delivery driver.

Parcels are sorted at one of dozens of distribution hubs. Tractor-trailers provide linehaul transportation service for ground parcels between hubs. For long distances, UPS has railroads transport the trailers. UPS is one of the largest users of trailer-on-flatcar (TOFC) railroad services in the U.S. Air parcels are transferred to an air network at the originating hub.

Air Network

UPS has an air fleet of 263 jet aircraft with 82 more on order. UPS also charters 346 aircraft. Additional capacity is chartered during the pre-Christmas peak season. (Note 31)

UPS's primary hub is the UPS Worldport(sm) in Louisville (KY). The hub employs 23,000 people, has the capability of handling 304,000 packages per hour and can be expanded to 500,000 packages per hour. UPS operates six additional regional hubs in Philadelphia (PA), Dallas (TX), Ontario (CA), Rockford (IL), Columbia (SC), and Hartford (CT).

Retail Network

UPS provides retail access to its delivery services through a number of different venues. UPS has always operated company-run counters at distribution hubs. Also, for many years, UPS services have been available at commercial mail receiving agents (CMRA's) such as Mail Boxes Etc., Parcel Plus and other stores such as Staples. CMRA's usually offer UPS services as well as that of competitors FedEx, DHL and the Postal Service. CMRA's usually require a surcharge over the commercial carrier rates to cover sale expenses. UPS also has numerous drop boxes in urban areas for the receipt of express envelopes and smaller parcels.

In the past two years, UPS has taken four steps to increase its retail presence.

Technology

UPS, like all of its competitors, has placed strong emphasis on technology to improve the speed and global outreach of its services. UPS's technology operations employ more than 5,000 people and the company's technology operations manage 14 mainframe computers, 2,269 mid-range computers, 228,200 PC's, and 70,000 devices to gather real-time delivery information.

UPS uses innovative information technology to manage its physical and human assets. Many years ago UPS saw the value of fleet and network optimization algorithms and purchased Roadnet, a company that specializes in network optimizing software. Since then UPS has marketed this expertise to delivery fleets through its UPS Logistics subsidiary. UPS introduced global positioning (GPS) in its vehicles in the early 1990's to achieve location and routing maximization. Drivers are in constant contact with dispatchers which allow for scheduling on-demand pickups with the truck closest to the customer's location. UPS has recently established a consulting unit to market UPS's technological advances.

Labor Issues

UPS employs 359,000 people. (320,500 in the U.S. and 38,500 internationally) All of its U.S. package sorters, over-the-road drivers, delivery drivers and airplane mechanics are union members. To assist its operations, UPS hires seasonal workers during the peak holiday period. In 2000, UPS hired more than 95,000 seasonal workers. UPS used nearly 3,500 additional drivers during its peak week in 2000, along with more than 30,000 driver helpers and almost 50,000 package handlers.

Negotiations with its Teamster-organized package sorters and drivers in 1997 resulted in a short strike. Negotiations in 2002 were concluded successfully without a strike.

Recent Developments

Over the past two years, UPS -- like all other carriers -- has weathered difficult economic times. In addition, UPS has experienced increased competition for its core ground parcel delivery customers as FedEx and Airborne have expanded and introduced ground delivery services. While the volumes these competitors handle are small compared to UPS, their entry has resulted in UPS intensifying its sales and marketing efforts, as illustrated by the "What can brown do for you?" advertising campaign.

UPS has seen success and profits from its investment in international markets, and in providing supply chain solutions and third-party logistics services. To continue its efforts to grow profits outside of its core business, UPS is currently streamlining and integrating information systems, sales and operations in its logistics, freight forwarding, and supply chain businesses.


APPENDIX G: United States Postal Service  (http://www.usps.com )

Corporate Overview

The United States Postal Service is the oldest parcel carrier providing service today. Its parcel service began in 1913 when Parcel Post was created. The Postal Service is the third-largest parcel carrier in the U.S., generating $7.7 billion in revenue from parcel products. The Postal Service is also the largest entity providing parcel delivery services in the U.S.; it generated $65.834 billion in total operating revenue during fiscal 2001. The remainder of the Postal Service's revenue comes from the delivery of correspondence, financial transaction documents, periodicals, advertising and other types of hard copy communication.

The Postal Service is unique among its competitors in three ways.

First, it is the only competitor owned by the federal government. As such, it has specific benefits, responsibilities, operating restrictions and management limitations that differentiate it from private-sector competitors.

Second, the Postal Service's labor relationship is governed by the Postal Reorganization Act which requires binding arbitration for all contract re-negotiations. All other carriers are subject to the Railway Labor Act for air carrier operations and the National Labor Relations Act for trucking.

Third, the Postal Service is the only competitor whose rates and services are regulated. The regulatory process requires the Postal Service to operate on a break-even basis. Also, the regulatory process allows competitors to contest Postal Service requests for product and rate changes. This legislative and regulatory process discourages retaining earnings during good years, and -- in turn -- fewer dollars are available to improve R&D, technology acquisition, machinery, buildings, delivery equipment and systems. The Postal Service has cumulative losses exceeding $6 billion, consequently it lags behind private-sector carriers in its ability to deploy the best-possible technologies.

The Postal Service has adjusted to its financial restrictions in two ways. First, the Postal Service has aggressively contracted of transportation services between postal plants. Second, the Postal Service has encouraged large customers to use parcel consolidators that now sort parcels in addition to providing long-haul transportation.

With the exception of some limited investments in electronic services, the Postal Service has struck to its core business delivering mail and parcels. Parcel products now account for 12% of the Postal Service's revenue -- Priority Mail brings in $4.9164 billion, Express Mail generated $995.7 million, and Package Services sales reached $1.999 billion. In 1996, the Postal Service's parcel products generated 10% of revenue.

Services

The Postal Service provides five primary parcel products: Express Mail, Priority Mail, Parcel Post, Parcel Select and Media Mail. Express Mail provides a guaranteed overnight service. Priority Mail provides 2-3 day nationwide delivery of parcels. Parcel Post is a ground parcel delivery service, primarily for retail customers. Parcel Select is a ground parcel service provided to commercial customers in conjunction with a second firm that transports the parcels from the shipper's origin to a postal facility near the destination. Media Mail delivers books, tapes, and CD's at preferential rates.

The Postal Service differs from its competitors in that it does not offer standard business terms to its corporate customers such as corporate accounts, volume discounts, or billing after a service has been rendered. Instead, payment is required up-front.

Network Operations

The Postal Service's strength is the reach of its delivery network. For both retail and commercial customers, the Postal Service offers the only delivery network that has a statutory mandate to serve every address in the U.S., U.S. territories and armed forces overseas -- more than 134 million delivery points. To meet this mandate, the Postal Service is the only carrier that can deliver to post office boxes located in 27,876 local post offices.

The Postal Service network provides local transportation, delivery and sortation of primarily retail parcels. Contract transportation provides most inter-city transportation of parcels and some intra-city service. Finally, parcel consolidators pickup and transport parcels to locations close to the last mile served by the Postal Service.

Postal Service Network

The Postal Service parcel-handling system is only part of its network for handling letters, periodicals and other types of hard-copy communication. With few exceptions, the facilities and vehicles used by the Postal Service handle both parcels and other types of mail.

The Postal Service operates 23 mechanized bulk mail centers whose primary purpose is the sortation of parcels, advertising mail and less time-sensitive mail. These facilities handle parcel sortation between regions and to individual postal plants within a particular region.

More than 350 plants handle parcel sortation to carrier stations and delivery units. These plants also handle the sortation of Express and Priority mail to other mail sortation plants and delivery units nationwide.

Postal Service delivery units handle the sortation of parcels, Express and Priority mail to carrier routes. The final delivery is handled by the Postal Service's 300,000+ city and rural carriers.

Supporting the Postal Service's network are more than 200,000 delivery vehicles. The Postal Service's vehicle fleet is used primarily by its letter carriers and for local mail collection.

Contracted Transportation

The Postal Service contracts for transportation using air, truck, and rail services. Trucking contractors provided $2.1 billion in services in fiscal year 2000, including tractor-trailers transporting mail between sortation plants; straight trucks moving mail between plants and delivery depots for distribution by carriers; and small trucks both transporting mail to delivery depots and dropping mail at individual customer addresses.

The Postal Service used $277 million in rail transportation in fiscal year 2000. The Postal Service is one of the largest customers of trailer-on-flat-car (TOFC) services and Amtrak's largest freight customer. TOFC service provides long-distance transportation for parcels and other, less time-sensitive, mail. Amtrak users both standard baggage cars and roadrailers, trailers that have two separate sets of wheels for rail and highway use.

The Postal Service's air transportation needs are met through a combination of cargo and passenger carriers. In fiscal year 2000, the Postal Service spent $1.7 billion on air transportation. In fiscal year 2001, the Postal Service made major changes to its air transportation network.

The Postal Service had contracted with Emery Airlines for both the transportation and sortation of priority mail on a limited basis from 1997 through 2000. This contract ended in 2000 with litigation over contract payments.

Through 2001, the Postal Service employed Emery World Airways to operate an Express Mail transportation network with a hub in Indianapolis (IN). The Postal Service employed Kitty Hawk Aviation to operate a western network and it hired separate contractors to run the ground operations at its Indianapolis and western hubs. These networks handled primarily Express and Priority mail but transported First Class letter mail as well. Both the air and ground contracts associated with the Indianapolis and western networks were terminated in August 2001.

In 2001, the Postal Service signed contracts with FedEx to transport Express, Priority and First Class mail. Since the September 11 terrorist attack, the Postal Service has increased its reliance on FedEx air transportation due to Federal Aviation Administration limitations on the use of passenger plains to carry mail and parcels. FedEx now handles about half the mail that used to be hauled by passenger airlines.

Parcel Consolidators

The Postal Service's largest parcel shippers use consolidators as a cost efficient method of accessing the Postal Service's extensive delivery network. These parcel consolidators handle the vast majority of the Postal Service's Parcel Post shipments. Parcel consolidators can offer their service profitably because the Postal Service offers substantial discounts for dropping parcels at locations close to final delivery points.

Originally, parcel consolidators limited operations to long-distance shipments because the tariffs only offered profitable opportunities on the longest shipments. Since 1999, with the introduction of drop shipping discounts to mail processing plants and delivery units, new opportunities opened for consolidation and sortation activities in addition to linehaul transportation. The largest consolidators opened automated hubs to sort parcels from multiple shippers for transportation to various Postal Service plants and delivery units.

Three of the largest consolidators are Donnelley Logistics, a subsidiary of R.R. Donnelley; Parcel Direct, a subsidiary of Quad Graphics; and Postal Freight Inc. Regional parcel carriers such as Western Parcel Express also provide consolidation in addition to their regional single-line service. Airborne also offers a branded consolidator service called airborne@home geared for parcels destined for residential delivery. Airborne@home combines Airborne's deferred air service with Postal Service's ability to deliver to every residential address

Consolidators transport parcels from the shipper's location to a postal facility near the destination. The Postal Service then provides the final sortation and delivery service. Parcel consolidators compete directly with the ground networks of UPS and FedEx Ground without the necessity of establishing a delivery network. These consolidators offer highly-competitive rates, sometimes as much as $1 to $4 below rates offered by UPS or FedEx Ground.

Parcel consolidators have two advantages over integrated carriers: First, consolidators can offer highly competitive rates due to the low delivery charges for drop-shipped parcels. Second, consolidators can offer delivery to P.O. boxes and Saturday delivery at no extra charge, a service that integrated carriers do not normally provide.

Consolidators also have certain disadvantages. The ground delivery service offered by parcel consolidators in conjunction with the Postal Service is slower than that offered by UPS and FedEx Ground. Consolidators provide less extensive tracking information regarding the packages they handle. Finally, in purchasing services using a consolidator, customers may deal with sales forces from both the consolidator and the Postal Service.

Labor

The Postal Services employs more than 800,000 full- and part-time employees. Postal employees are nearly all organized either within unions or management associations. Management associations cover Postmasters and postal supervisors. Four postal unions -- the American Postal Workers Union, National Postal Mail Handlers, National Association of Letter Carriers and National Rural Letter Carriers Association -- count as members the vast majority of postal employees.

The Postal Service and its unions negotiate contracts under the Postal Reorganization Act. Under the Act, labor agreements are set under binding arbitration if management and labor cannot agree to a contract. The Postal Service is also subject to certain employment and pay restrictions. Management salaries are capped at the level I of the executive schedule, which in 2002 was $157,000. The Postal Service is subject to federal rules that require employment preferences for veterans. Worker compensation claims are more generous than those available under state mandates.

Recent Developments

The Postal Service is in the midst of a serious financial crisis that has been exacerbated by the terrorist attacks in September and October 2001. The terrorist acts in New York, Washington DC and Pennsylvania caused mail revenue to shrink by $300 to 400 million per month and raised operating costs. The subsequent anthrax attacks shut two plants and increased costs for decontaminating facilities and nearly eliminated mail as a communication mode with the federal government and some media outlets. To offset these expenses, the Postal Service received $675 million from the federal government for anthrax clean-up costs.

The Postal Service's core financial problem before the terrorist attacks were all evident before September 11. First, the Postal Service's liabilities far outstrip its assets. Second, the business does not generate sufficient cash to prevent service deterioration. Third, the business generates substantial operating losses. Finally, debt limits and the lack of access to equity capital restrict the Postal Service's ability to deal with critical problems.

The Postal Service has substantial liabilities for workers compensation, pension and retirement costs. Recently, the Office of Personal Management re-calculated the Postal Service's pension obligations. The recalculation indicated that the Postal Service has nearly funded its pension obligation, and that its outstanding obligation should now be estimated at about $5 billion. While the change -- if allowed by Congress -- will significantly reduce the Postal Service's cash needs during the next few years, congressional approval has not been given as of this writing.

All of these financial problems are complicated by the Postal Service's debt problems. The Postal Service has covered its operating losses and some of its capital needs through borrowing. Its long-term debt nearly equals its cumulative losses. The Postal Service's total debt reached about $12 billion at the end of the 2002 fiscal year.

To deal with its challenges, the Postal Service has begun a transformation process. In 2002, the Postal Service published a transformation plan that detailed both short-term and long-term changes that it seeks to ensure its ongoing viability. The Postal Service has begun implementing actions detailed in the plan that do not require legislative change. The Postal Service submitted its first negotiated service agreement (NSA) for approval by the Postal Rate Commission in the fall of 2002. The Postal Service is also conducting a network restructuring study that is expected to recommend changes to streamline processing.

The Postal Service may also be subject to legislative change. While the final version of Congressman John McHugh's reform legislation died in committee in the 107th Congress, interest in reform legislation still exists. The Postal Service has placed a number of legislative proposals on the table as part of its Transformation plan.  More importantly in December of 2002, a Presidential Commission was appointed to examine the roll of the USPS in the 21st century, examine the need for the Service to have flexibility to changes prices, control costs and adjust service levels in response to financial, competitive and market conditions; review unnecessary rigidity that impedes the services ability to perform; report on the ability over the long-term of the Service to maintain universal service at affordable rates and cover it unfunded liabilities with minimal taxpayer exposure; examine the extent to which monopoly restrictions advance public interests; and make recommendations with respect to governance and oversight.  This charter suggests that the recommendations made by the Commission, if enacted by Congress, could significantly affect how the Postal Service provides parcel delivery service in the future.


Notes and Disclaimers

Disclaimers

This report presents a general overview of the package delivery industry. Because information is in constant flux, readers are advised to contact carriers directly for the latest news, information, statistics and service options.

All trademarks and service marks used in this report are the property of their individual owners.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that the authors, editors, publishers and distributors are not engaged in rendering legal, accounting or other professional services. If legal or other expert assistance is required, the services of a competent professional person should be sought.

This report does not imply or infer a recommendation or endorsement of any individual, company, service, or organization. Those with parcel delivery needs are advised to seek the providers and programs which best meet their specific requirements.

Notes

1. Edward K Morlok, Bradley F. Nitzberg and Karthik Balasubramaniam (with the assistance of Mark L. Sand), "The Parcel Service Industry in the U.S.: Its Size and Role in Commerce," August 1, 2000, p. 15 (Available online in a PDF format at: http://www.seas.upenn.edu/sys/logistics/parcelfullrpt.pdf)

2. Ibid., p. 23.

3. There is at least one small nationwide carrier, Airnet Systems. This firm specializes in meeting the needs of banks and express shippers who have overnight transportation needs that the larger carriers cannot meet.

4, These firms include Eastern Connection, Western Parcel Express, Central Parcel Express, Beaver Express, Tex Pack and Lone Star Express.

5. Same day parcel delivery carriers offering service in multiple cities include Velocity Express (United Shipping & Technology), Dynamex, Consolidated Delivery & Logistics, and Noble International.

6. These firms were Adams & Company, Wells, Fargo & Company, American Express Company, and Southern Express Company.

7. Purolator Courier, Canada is now a subsidiary of Canada Post. Purolator has some limited sales operations in the U.S. marketing trans-border service to Canada. Purolator offers service from Canada to the U.S. via its partner, Airborne.

8. Deutsche Post's revenue figure is as reported in its 2001 annual report. DHL's revenue is not included in Deutsche Post's figure. In 2002, Deutsche Post will likely include DHL revenue and profits in its consolidated results.

9. The Postal Service's network handles substantial volumes of mail -- 46 percent of the world's letters and cards -- along with parcels. See: http://www.usps.com/history/pfact00.htm

10. Airborne's largest delivery contractor is the USPS. It provides the delivery component of Airborne's airborne@home service.

11. Carriers with early morning operations may operate special runs to handle express parcels to meet delivery commitments.

12. Discussion of BAX Global and Emery will be included in this section because Colography includes these carriers in their data and the Colography data is the primary data source for this section. These firms are only peripherally involved in transporting parcels to the extent that their heavier freight customers demand. The data presented confirms this.

13. The carriers also charge extra for other costly delivery locations such as sparsely populated areas as well.

14. Airborne's operating model now parallels UP's, so UPS is no longer alone in offering the capability of having a single pickup for transporting overnight, deferred air and ground delivery transportation of parcels.

15. Emery's closure of its airline in 2001 may affect its future air freight marketshare.

16. The Postal Service, unlike Airborne and FedEx, does not follow UPS's lead in setting prices. Instead it adjusts prices on a less regular basis with adjustments in rates more focused on overall revenue needs, including costs associated with letter and advertising mail rather than changes in competitor prices for parcel delivery.

17. See the Airborne Express 2001 Statistical Report, at: 

http://www.airborne.com/Investor/FinancialInfo.asp?nav=AboutAirborne/InvestorRelations/FinancialInformation

18. See: http://www.airborne.com/about/pr/PRDetail.asp?nav=AboutAirborne/CompanyInfo/PressReleases&seq=240

19. This is the same contract that covers Teamster organized less-than-truckload carriers.

20. See: http://backup.teamster.org/divisions/freight/message.html.

21. See: http://www.ttnews.com/members/printEdition/0005508.html

22. See: http://www.airborne.com/about/pr/PRDetail.asp?nav=AboutAirborne/CompanyInfo/PressReleases&seq=235

23.See: http://www.airborne.com/about/pr/PRDetail.asp?nav=AboutAirborne/CompanyInfo/PressReleases&seq=207

24. See: http://www.iecc.ch/Origins/origins.html

25. Estimating DHL United States domestic revenue is difficult as DHL Worldwide Express, the parent company is privately held. The figure reported here is based on an analysis of Colography data and trends in air express traffic between 2000 and 2001.

26. CNF's purchase price for Emery including Purolator was less than the price Emery had paid for Purolator.

27. Kristen S. Krause, "CNF Reorganizes," Traffic World, December 10, 2001, pp. 24-25.

28. "FedEx To Nearly Double FedEx Ground Volume Capacity," Dow Jones Business News, September 30, 2002. See: http://biz.yahoo.com/djus/020930/1402000744_1.html

29. "FedEx Signs Lease for Piedmont Triad Cargo Hub," FedEx Corporation press release, October 14, 2002, See: http://biz.yahoo.com/prnews/021014/chm016_1.html

30. The historical information in this section is drawn from: http://pressroom.ups.com/about/history/0,1055,,00.html.

31. "Aircraft Fleet Fact Sheet," UPS website. See: http://www.pressroom.ups.com/about/facts/0,1703,332,00.html