Parcel - March/April 2009 - (Page 26) Dealing with Uncertain Times The economy is at a low point, but there are steps you can take to mitigate the impact on your bottom line either the second or third largest single cost on parcel carriers’ income statements (second only to labor and occasionally purchased transportation), the effect of volatile fuel prices is predictable. While fuel prices are relatively low as of this writing, there seems to be no confidence that fuel prices will stabilize in the short- to mid-term. As a result, carriers are taking the standard approach of hedging in the options market; however, they are also hedging their bets by the way they approach pricing. Changes in the Parcel Arena In November 2008, DHL announced that it would discontinue its intra-US services as of January 31, 2009. Since entering the domestic US market in 2003, DHL has been a destabilizing force in parcel pricing. Its initial US market strategy was to offer prices well below the market. This made sense at the time, as DHL needed to achieve a certain critical mass to sustain the growth of a national carrier system. However, this action disrupted the unspoken pricing truce UPS and FedEx had established. With DHL leaving the market, the not insubstantial volume DHL was carrying is up for grabs. What we expect to see in the coming months is a pendulum effect. We initially expect to see aggressive pricing from both UPS and FedEx in an effort to secure the majority of the DHL shippers, followed by more conservative pricing as both carriers respond to fewer competitors in the market. The short-term feeding frenzy will surely be followed by calm waters, in which both UPS and FedEx will re-establish the status quo. What does this chaotic marketplace mean to you? The implications will be different for each shipper, but two factors will be nearly universal. If you have been considering negotiating new agreements with your parcel carrier(s), now is the time to act. The market is still in flux. Once a new equilibrium is established, I believe the trend will be toward more conservative is no question that the parcel industry is facing uncertain times. However, this uncertainty in our logistics environment is nothing compared to that faced by Europe in the early 1800s. In 1812, Napoleon was poised to consolidate his power by conquering Russia; however, this stretched his logistics tail to the limit. Russia exploited this weakness by refusing to engage Napoleon’s forces. Rather, they withdrew deeper into Russia, away from Napoleon, stretching an already thin supply chain even further. The Russian forces also made a habit of burning their cities prior to abandoning them, denying the French forces the supplies and provisions they might have looted. Many historians suggest that had Napoleon’s logistics tail been thicker, or had the French forces been able to resupply from onsite resources, the outcome may have been very different. There are two important lessons to be learned from Napoleon’s example. First, uncertain times often result in unexpected results. Second, and more to the point, logistics is a crucial factor in the success of any organization. Although the current economic turmoil may not be on the same scale as Europe during the Napoleonic Wars, it is having an unusual, and some say unprecedented, impact on companies worldwide. This is nowhere more true than in the logistics arena. In 2008, FedEx Express volumes were down 7.3% from 2007 levels. FedEx Ground, and indeed the entire parcel market, experienced similar declines. Moreover, without exception, every piece of market research I have seen in the last three months has projected continued weakness in parcel, truckload and LTL volumes. From May 2007 to May 2008, the US Gulf Coast Spot Price of Kerosene-Type Jet Fuel increased by 82.8%. From May 2008 to December 2008, the price fell by 49.7%, falling to its lowest point since March 2007. Given that fuel is typically There — By Joe Wilkinson — 26 MARCH 2009 | www.PARCELindustry.com http://www.PARCELindustry.com
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