Editor's Note: The following story was written prior to the terrorist attack on the U.S. and the resulting air shutdown.

If it seems like only a year ago, that's because it was.

It was only a year ago that replacement parts were frantically being shipped top priority across the country and the globe—whatever the cost—to keep those all-important manufacturing lines up and running during the 2000 manufacturing boom. Those days are over and the demand for small package shipping services has dropped significantly in 2001 due to the manufacturing slowdown. Fewer parts need to be shipped because manufacturing is so low and cost-cutting measures are limiting the amount of express shipping being used for those parts.

But while volumes are going down, the quality of service expected from shippers is rising, as customers get more shipping data from improved information systems and can more closely track their packages and the performance of their carrier.

The Colography Group predicts continued
growth for packages under 70 pounds in the
U.S. after a drop in 2001.

Slam on the brakes

Ted Scherck, president and CEO of Atlanta-based consulting firm The Colography Group, says the small package express market is being hit hard by the recession, as shippers opt for less than express services to cut costs. Scherck sees a big trend this year in shippers downgrading from overnight air to deferred air to conserve. And with some ground parcel carriers now offering a time-definite guarantee on ground parcels, many customers that were using deferred air have moved down to time-definite ground, particularly in the short-haul market. Customers today are not concerned with how the package gets there, Scherck says, only when it gets there.

Airborne Inc. of Seattle confirmed the downward trend in its second quarter results statement, when Carl Donaway, president and COO said, "Our overnight express and next-afternoon segments experienced a drop in volume as customers shifted to the lower-cost alternatives of second-day and ground delivery."

Airborne officials don't see much relief in the second half of 2001 either. "Based on the lack of visibility regarding any improvement in the economy, for the second half of the year we anticipate negative shipment growth in our higher yielding express products, but modest shipment growth overall due to the expansion of our deferred and ground products," said CEO Robert Cline in the statement.

As more shippers move away from express services, the better the pricing gets for those services. For example, the U.S. Postal Service in August quietly began offering its first-ever discounts in its two-year-old Global Express Guaranteed delivery service, cutting the price by as much as 38%.

In the second quarter, the average daily package volumes for UPS Next Day Air were almost equivalent to the volumes seen in 2Q00. The volumes for the first half of 2001 were up slightly. UPS spokesperson Steve Holmes says that small package volumes are down this year overall for UPS but the volumes don't affect the end user price as much as the company's bottom line.

"Rate increases are set at the beginning of the year, but we don't raise rates if we lost money last quarter," he says. In the beginning of 2001, UPS increased its domestic air rates 3.7% and its domestic ground rates 3.1%.

FedEx also reported a drop in volumes for its express services in the fourth quarter ended May 31. In a company statement, Alan B. Graf, Jr., executive vice president and CFO said, "Continuing weak economic conditions, particularly in the high-tech and durable goods sectors sharply reduced demand for our express services. U.S. domestic average daily volume at FedEx Express declined 6% year over year for the fourth quarter." As part of prioritizing the company's resources in the slower economy, FedEx Express reconfigured its network to no longer offer a Sunday delivery option for FedEx Priority Overnight service, effective August 27.

"If you had to characterize the market for transportation services in freight domain, the general economic perspective is it's down," says Richard Hallal, a consultant with Logistics Development Corp. of Cleveland. "We're starting to see some early indicators of something that may be more than macroeconomic. They may be some more fundamental shifts in the way shippers buy these kinds of services and we're in the early stages of these services."

New information systems are giving users more insight into the performance of their shipping providers and leading shippers to expect more from express service providers. Hallal says as supply chain management systems provide more visibility into the supply chain, costs for express shipping services are thrust into the forefront. In the past, a company would use one shipping provider for all of their small package deliveries, regardless of size, destination or cost. It was simply easier to manage with a single carrier. Today, there is significant savings at stake and the ability to contact a variety of shippers and services allows businesses to customize their shipping to more accurately suit their own needs and find increased savings.

"We see that logistics managers and some purchasing managers are really scrutinizing parcel service cost performance more than ever as a result of this," says Hallal. "By definition, express package is one of the most data intensive pieces of the transportation marketplace. We're seeing that scrutiny result in a trend. Today there are better systems, better options and greater visibility to these transactions among the buyers."

Scherck says the new online tracking systems are a win-win for shippers and carriers. The shippers can log into the carrier's Web site and know exactly when their package is received. That saves them a phone call to the carrier and it saves the carrier a bit of customer service time.

Holmes says UPS has accepted the idea that managing the small-package supply chain today means keeping up with technology and upgrading technology systems often. "We invest more than $1 billion a year in technology and that's more than we spend on vehicles," Holmes says. UPS uses sophisticated GPS mapping to expedite small package delivery and computer modeling to determine the most effective shipping methods. It also recently unveiled plans to deploy the world's largest wireless LAN and short-range wireless Bluetooth network throughout its worldwide distribution hubs.

Airborne is also investing heavily in technology upgrades. "Customers are demanding faster access to tracking information," says company spokesperson Robert Mintz, who estimates that nearly 90% of Airborne's business involves packages under five pounds. "We are currently in the process of converting to wireless systems that will improve the communications between drivers, dispatchers, and Airborne stations. The systems we are implementing will result in real-time delivery of tracking information so customers will have access to proof of delivery information immediately instead of waiting for the driver to return to the office."

Rising fuel costs in the past year have led most shippers to add a fuel surcharge to shipping cost. For example, FedEx ground instituted a 1.25% rate hike in August 2000. In February 2000, Airborne Express implemented a 3% fuel surcharge and in October an additional 1% was added. The total 4% surcharge is still in effect today.

"The fuel surcharge was put in place to predominately cover the excessive increases in jet fuel costs, and has provided little coverage over fuel spending for ground vehicles," says Mintz.

UPS has been hit hard by fuel costs in the past few years and sees no end in sight. The company budgeted for an additional $130 million in fuel costs in 2000 and used that up in the first two quarters of the year.

"With the level of activities we have with vehicles and aircraft, our fuel spend is enormous," says Holmes. "Our fuel spend a couple years ago was in the $700 million and now it's in the $900 million range. We kept waiting for fuel prices to come down and stabilize but finally last year in August we put a fuel surcharge in place for the first time in 20 years. It was 1.25% on all transportation. We keep hoping these prices will stabilize at a lower level and we can take that surcharge down, but I can't make any predictions on when that will happen."

Scherck takes a broader look at prices and points out that, despite the recent fuel surcharges, costs to ship small packages and documents overnight have dropped. "When the overnight letter first came out, a shipper paid $15.50 in early 1970 dollars, which inflation adjusted, means $25 to $30 in today's money. Most shippers today with discounts pay less than $10 to get the same job done."

There are new niche shipping providers popping up in the gaps between the services offered by the major shippers like FedEx and UPS and the trend is moving towards using several shippers selected for specific service, rather than a single one.

One new express firm that is using technology to its advantage is Dallas-based NextJet, which focuses primarily on same-day delivery of small packages, most frequently parts for the electronics industry. According to Steve O'Brien, CEO of NextJet, the high-tech companies in the networking, telecom and PC industries are the most frequent users of same day shipping. NextJet is an asset-free model and does not own any infrastructure such as planes or vans. It oustsources those services and focuses solely on the logistics management and tracking side of the equation using Web technologies.

O'Brien says there are really two separate technology categories that play into the asset-free shipping business. One is the online technology or Web-based technologies that allow a company like NextJet to easily connect with regional courier shops that may not have a serious infrastructure and track packages. "The Web platform lets them become part of your network," he says. Secondly, wireless technologies are key to tracking packages and, according to O'Brien, have become much more affordable and useable in the past couple years.