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Express delivery firms caught in a slowdown

Amid an ailing economy and high fuel prices, customers cut back

June 19, 2008|Ronald D. White | Times Staff Writer

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

Budget-conscious shippers are deciding their packages and envelopes can take a slower path to their destinations, going by second-day air or, even slower, 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 Wednesday.

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, probably bringing layoffs to DHL's 350-employee West Coast air hub in Riverside County.

"Customers are definitely trading down to cheaper services," said Norman Black, spokesman for Atlanta-based United Parcel Service Inc. "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 Venice 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% in the latest quarter compared with a year earlier, while less profitable ground deliveries edged 0.3% higher. Overall U.S. volume was flat.

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

On Wednesday, the Memphis, Tenn., company reported a loss of $241 million for its fiscal fourth quarter and blamed its only quarterly loss in 11 years largely on a write-down because it's changing the name of its Kinko's unit to FedEx Office.

FedEx said earnings for the next year wouldn't meet Wall Street's expectations because eye-popping fuel prices inflated the company's costs and a sputtering economy reduced demand. FedEx's financial results are widely considered to be a reliable indicator of how the overall economy is performing.

The 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% fuel surcharge for domestic express packages, up from 18.5% in March. The surcharge will increase to 32.5% on July 7.

"Once we crossed over that threshold and started turning toward 30%, our customers wanted to take a second look" at reducing shipping costs, FedEx Chief Financial Officer Alan Graf said in a conference call with analysts and the media. 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."

The U.S. Postal Service can't impose fuel surcharges the way its privately run competitors do. The post office ended its most recent quarter with a $707-million net loss and a 3.3% drop in mail volume.

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. FedEx is pushing hard on ground delivery while UPS is emphasizing peripheral services such as packaging and warehousing.

DHL has been left at the gate.

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