It's doubtful regional parcel players can build a national network the likes of FedEx's and UPS's. But there are other ways to skin the parcel cat.
Article Written By: Mark B. Solomon, Executive Editor at DC Velocity
One thing that can be said about the supply chain: It is a Petri dish for new ideas, even if many of them end up being unworkable in practice.
Take the notion that a group of regional carriers could cobble together a third national network to fill the void left by DHL Express when it exited the U.S. market in January 2009. Few question the need for more parcel competition, especially as FedEx Corp. and UPS Inc., who dominate the U.S. parcel business, continue to raise rates, and add or increase accessorial charges, seemingly in lockstep.
In addition, the creation in 2008 of the "Reliance Network," a group of eight regional truckers in the U.S. and Canada that joined forces to build a nationwide infrastructure, has shown that a national model built around the amalgamation of regional carriers can gain acceptance with shippers.
Yet in the parcel world, which is a different kind of transport animal, the reality is that a third national network similar to what DHL attempted is unlikely to materialize. Beyond the cost of replicating a model that took FedEx and UPS many years and billions of dollars to build, each of the largest regional carriers has its own operating schemes, customer targets, and pricing matrixes, which would be difficult to integrate on a national scale.
The technologies are also disparate, though there has been progress to develop an IT backbone to support a unified infrastructure. One Network Enterprises, a Dallas-based IT provider, has created the "Real Time Value Network," which One Network says gives 30,000 parcel users across the U.S. real-time visibility of the shipment cycle from order placement, to proof of delivery, to reporting, online billing, and payment options. Last September, Greyhound Package Express, the parcel unit of the legendary intercity bus operator Greyhound Lines Inc., joined the network to link its depots with local parcel haulers.
But harmonized technology may be the least of the roadblocks. A September survey of 17 large regional carriers by Shipware LLC, a San Diego-based parcel consultancy, found that only 17 percent believed a unified IT network was the greatest challenge to creating a nationwide infrastructure. By contrast, 50 percent said the main impediment was developing a fair system for carriers to share their revenue on interline moves. About 33 percent said the primary challenge lies with the ability to merge different specializations, equipment, and service standards.
According to Rob Martinez, CEO of Shipware, regional alliances work best when they involve contracted rates based on the number of stops a driver makes, rather than the number of packages carried. "The ideal customer has multiple pieces going to a single destination," said Martinez, adding that delivery density is the key element in executing a profitable venture.
Building package density is easier said than done. In fact, Rick Jones, CEO of Lone Star Overnight, an Austin, Texas-based carrier that serves Texas, Oklahoma, western Louisiana, and southern New Mexico, and through an alliance with Mexican carrier Estafeta reaches all of Mexico, said the lack of density is probably the biggest reason why a national network would not succeed. Even DHL Express, a major carrier by any measure, failed to achieve sufficient density in the U.S. to compete profitably against FedEx and UPS, Jones said. According to unscientific estimates, UPS alone carries as many packages and letters in two business days—about 32 to 33 million pieces worldwide—as the largest regional carrier moves in a year.
Jones said strategic alliances can broaden a regional carrier's reach without the inherent complexities of a revenue-sharing agreement. Six months ago, Lone Star began a venture with OnTrac, a regional carrier serving eight western states, including all of California. Under the venture, called "LSO Plus," Lone Star loads a 53-foot tractor-trailer in Austin and brings it to On-Trac's Phoenix facility. There, some of its customers' packages are inducted into OnTrac's system to be locally distributed. The truck then rolls on to OnTrac's main distribution center in Commerce, Calif., just east of Los Angeles, where the rest of the packages, which are bound for West Coast markets, are fed into OnTrac's system for delivery.
Lone Star bills its customer for the through move and pays OnTrac for the regional distribution. Lone Star is the customer's main point of contact. All surcharges associated with the service are the same between the two carriers, minimizing any chance of customer confusion, Jones said.
OnTrac does not currently ship into Lone Star's territory, mainly because it is too costly for the venture, which has yet to turn a profit, to run a 53-foot tractor-trailer from California to Texas, Jones said. Lone Star has enough faith in the model to seriously consider expanding it into the Midwest, the most logical adjacent geography for the company, Jones said.
E-COMMERCE'S IMPACT
Yet the need for a national parcel system may be mooted by a force of nature called e-commerce. Most e-commerce shipments move between 300 and 500 miles, which mirror the average length of haul in most domestic truck commerce. The distance fits smartly within a regional carrier's territory. In addition, because regional carriers serve a limited geography, they can focus their resources on offering later cutoff times and still make next-day ground deliveries within a 400-mile radius, something FedEx and UPS generally don't do. This is a boon for online retailers whose "stores" are open 24/7 and who must placate impatient consumers and businesses that want their products yesterday.
The growth of e-commerce could make the regional carrier world an interesting place by mid-decade. As e-merchants expand their fulfillment locations to shorten delivery times, they will also need to enlarge their transportation footprint. They could continue to buy transportation, or become vertically integrated by acquiring a regional carrier or two. It wouldn't take much capital for the likes of Wal-Mart Stores, Target Stores, Amazon.com, and e-Bay to snap up a regional player to have a closed-loop distribution network.
Foreign companies who lack an e-commerce presence in the United States may find regional players appetizing targets. FedEx and UPS, tired of watching the regionals siphon off volumes in a fast-growing segment, may buy out some of the players just to take them off their field. Even truckload and LTL carriers could enter the buying fray to round out their product portfolios.
Then there is the chance none of the above occurs and the industry morphs through a series of alliances into two or three "super-regionals" forming a de facto national network. One company that may be positioned to grab the baton is Pitt-Ohio, a Pittsburgh-based regional LTL and truckload carrier that three years ago entered the ground parcel business. Privately held Pitt-Ohio is cash-rich and has experience with a super-regional infrastructure as one of the partners in the "Reliance Network." In 2011, it acquired US Cargo, a Columbus, Ohio-based parcel carrier serving eight states in the Midwest, Ohio Valley, mid-Atlantic, and Northeast. US Cargo, which still operates independently, has an interline relationship with Eastern Connection, a Massachusetts-based regional carrier whose network stretches from Maine to Virginia.
Pitt-Ohio wants to expand its ground parcel operations, which began as an adjunct to its core offerings. It already interchanges tracking and billing data with OnTrac, US Cargo, Eastern Connection, and other parcel carriers, according to Kent Szalla, general manager of its ground division. It develops revenue-sharing arrangements with other carriers on a case-by-case basis, he said.
Pitt-Ohio rolled out the parcel service on a limited scale, initially selling it only to current customers or shippers who've done business with the carrier before. At the time, Szalla said it was building the parcel product piece by piece. Three years later, the company still seems to be in no rush to blast it out to the marketplace.
"Our mantra is crawl, walk, and then run," Szalla said in an e-mail. "We already began to crawl by bringing on opportunities that fit. Walking, and then running, will take some time."
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