Delivery companies feel cuts


Budget-conscious shippers are deciding to take the slower path

June 26, 2008|By Ronald D. White

Sometimes it doesn't absolutely, positively have to be there overnight.

Budget-conscious shippers are deciding that their packages and envelopes can take a slower path to their destinations, going by second-day air or, even more slowly, by truck. Some businesses are just plain sending less.

The shift, propelled by the declining economy and record fuel prices, was reflected in FedEx Corp.'s dismal earnings report last week and UPS' warning this week that profit would be lower than forecast.

The changing outlook has altered the way the Big Three express delivery companies compete for air and ground shipments. It's also pushing DHL Express into the arms of a rival.

"Customers are definitely trading down to cheaper services," said Norman Black, spokesman for Atlanta-based UPS. "The stagnant economy is affecting almost all of our business customers, and when business slows down, they don't have as much to ship."

Company owners once considered the cost of overnight delivery part of the price of doing business.

Jonathan Rapaport curbed his quick-delivery habit when he realized that $1 out of every $15 he was projecting to bring in this year was being spent on overnight shipping. Rapaport's small Los Angeles company, Great Work Perks, specializes in developing incentive programs that companies use to reward their employees.

"The cost was getting ridiculous. It was my biggest expense," said Rapaport, who now reserves overnight mail for big, new clients. For others, he uses virtual coupons that employees can print and trade for their desired reward.

UPS said the average number of daily domestic overnight air shipments it handled slipped 3.8 percent in the latest quarter compared with a year earlier, while less profitable ground deliveries edged 0.3 percent higher. Overall U.S. volume was flat.

FedEx saw domestic overnight shipments fall 7 percent for envelopes and 1 percent for boxes in the latest quarter, compared with last year. Overall average daily U.S. volume declined 3 percent.

Overnight companies have compensated by adding hefty fuel surcharges while keeping a close eye on what the others are charging. Those extra fees have only increased the pressure on businesses to find less expensive ways to deliver their goods.

FedEx adds a 28 percent fuel surcharge for domestic express packages, up from 18.5 percent in March. The surcharge will increase to 32.5 percent July 7.

"Once we crossed over that threshold and started turning toward 30 percent, our customers wanted to take a second look" at reducing shipping costs, FedEx Chief Financial Officer Alan Graf said in a conference call. The company is counting on strong international business and domestic cost cuts to improve the earnings picture, he said, "while at the same time - unlike some in our market - not sacrificing service."

Business owners like Neal Harris shifted from ignoring express mail costs to negotiating with clients about how quickly they really needed his products.

Harris operates two small Los Angeles companies - ScentEvents and Harris Fragrances - devoted to the world of smells. The entrepreneur assembles as many as 200 ingredients to come up with aromas to enrich events and everyday products.

"The cost has just gotten insane. We sent one 2-ounce, nonhazardous fragrance sample from our New Jersey lab to Los Angeles. It was $45, including a $9.93 fuel surcharge," Harris said.

"Now, I'll ask a customer, 'Do you really need it Friday?' If it's yes, I ask by what time. I'll ask if they are willing to pay for overnight," Harris said. "I'll tell them I'll pay the freight if I can ship it by Monday. A lot of the time, the answer is that they can wait."

UPS and FedEx have been fairly well prepared to handle a shift to less profitable ground delivery, said Stifel, Nicolaus & Co. analyst David Ross, who is based in Baltimore. The companies have strong delivery networks that can ship a package to a destination by ground in as few as two or three days, he said.

DHL has been left at the gate.

"They have been hurt more by this than UPS or FedEx," Ross said. "Ground is growing and air express is shrinking and 45 percent of DHL's revenues came from next-day air service. That was one of their niches: large, corporate customers sending lots of documents by next-day air."

DHL, which lost more than $900 million in 2007, last month said it would ground its aging fleet of bright yellow jets and contract with UPS as its U.S. flight arm. Plantation, Fla.-based DHL, a subsidiary of Deutsche Post World Net, will concentrate on a streamlined ground delivery business, closing one-third of its U.S. branch offices, and reduce pickup and delivery routes by 17 percent.

Ronald D. White writes for the Los Angeles Times.

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