Competition Within

The United States

Parcel Delivery Market

 by 

Alan Robinson, President
Direct Communications Group

2408 Colston Drive, #103 M Silver Spring, MD M 20910
Phone: (301) 589-6273 M Fax: (301) 608-3637 M E-Mail: alanrob@attglobal.net

This study of the American parcel delivery market was produced in part from a grant received by the author (Alan Robinson) from Deutsche Post World Net (http://www.dpwn.com/en_de/)The information and or opinions expressed in this report are solely the author’s. The author also would like to thank David Rawnsley of Postal Services, Inc, Aman Boyd, and Krisshawn Stanley for their research assistance in developing this paper.Comments on this report may be sent to the author at the address noted on the front page.

The report is being distributed by the Association for Postal Commerce (PostCom) with permission as a service to PostCom members and all others who share an interest in a vital, competitive postal services market. Comments on this report also will be accepted by the Association for Postal Commerce in writing (1901 N. Fort Myer Dr., Ste. 401, Washington, DC 22209-1609, U.S.A.) and by email (info@postcom.org).This report may be reproduced in whole or part in written or electronic form with the written permission of the author. Additional copies of this report can be obtained from the Associaton for Postal Commerce by way of a written or electronic request. 

Gene A. Del Polito, Ph.D.
President
Association for Postal Commerce
1901 N. Fort Myer Dr., Ste. 401
Arlington, VA 22209-1609
U.S.A.
Ph.: +1 703 524 0096
Fax: +1 703 524 1871
http://postcom.org

Table of Contents

Executive Summary

I.          Parcel Delivery Overview

Financial Comparisons
Operating Comparisons
Workforce Characteristics
Variable verses Fixed Networks
Integrated verses Parallel Networks
Joint verses Single-Line Service
Service Comparisons

II.        Competitive Structure

Type of Origin and Destination
Shipper Sophistication
Shape and Weight
Speed
Shape and Speed
Overall Market Growth

III.       Market Trends

Key Factors
Looking Toward The Future

IV.       Conclusion

Appendix A: Airborne

Corporate Overview
Services
Operating Characteristics
Retail Network
Labor Issues
Recent Developments

Appendix B: BAX Global

Corporate Overview
Services
Operating Characteristics
Labor Issues
Recent Developments

Appendix C: DHL

Corporate Overview
Services
Operating Characteristics
Retail Network
Labor Characteristics
Recent Developments

Appendix D: Emery Worldwide

Corporate Overview
Services
Operating Network
Emery and USPS
Recent Developments

Appendix E: FedEx

Corporate Overview
Services
Network Operations
Air Network
Ground and Delivery Networks
Retail Network
Labor Characteristics
FedEx and USPS
Recent Developments

Appendix F: UPS

Corporate Overview
Services
Network Operations
Ground Network
Air Network
Retail Network
Technology
Labor Issues
Recent Developments

Appendix G: United States Postal Service

Corporate Overview
Services
Network Operations
Postal Service Network
Contracted Transportation
Labor
Recent Developments

V.      Notes and Disclaimers

Executive Summary

In the coming year American consumers will spend more than $50 billion to ship parcels, packages, and overnight letters. This is an enormous sum, yet the importance of the delivery business to the economy is relatively unknown.

Why? Because while the delivery industry is an everyday necessity, much of the business news in the past several years has featured such "alluring" and "exciting" subjects as the Internet, e-commerce, DSL, and telecommunications.

So how big is this mundane business of delivering stuff? How important is it?

• The U.S. Postal Service says it "anchors a $900 billion domestic mailing industry that employs roughly one in fifteen American workers." Given a domestic workforce of 143.1 million people in October 2002, more than 9.5 million U.S. jobs are related to the postal system.
  
• UPS had profits of $2.4 billion in 2001. In comparison, media and online giant AOL Time Warner lost $4.9 billion, while General Motors had a net income of $601 million and IBM earned $7.7 billion.
  
• The U.S. Postal Service has more employees than any domestic business except Wal-Mart.
  
• The $584 million profit generated in fiscal 2001 by FedEx was more than six times larger than the $90.4 million in net income earned by EBay in 2001.
  
• The parcel delivery market has been the fastest-growing transportation segment in the United States over the past two decades. This market has more than doubled its share of the nation's transportation budget since 1980 and now carries at least 10% of each day's gross domestic product. (Note 1)

While the parcel, package and overnight delivery business is massive, figures from the Colography Group, an Atlanta market research organization which specializes in shipping and transportation issues, show that for the first three quarters of 2000 important industry sectors were dominated by a few major players. (Note 2),

In the "parcel" sector, a category which includes packages weighing from 2 to 70 pounds, UPS collected 63.9% of all revenue. UPS generated more than 80% of the revenue from parcels handled as "ground" shipments.

In the "overnight" category, FedEx took in 58.2% of all overnight letter receipts and 59.3% of all revenue from packages under 2 pounds.

The Postal Service generated 70.4% of the revenue from parcels under 2 pounds that were handled as a deferred air (2-3 day service).

The marketplace is not static however. In some important ways new parcel distribution patterns are beginning to develop. The Internet has expanded the reach of direct marketing; in particular the share of retail transactions requiring home delivery has grown. Globalization has created the need for parcel carriers to expand their networks worldwide.

Since the 2000 data was recorded, both FedEx and Airborne have significantly expanded their capability to compete with UPS's dominant ground delivery service. UPS has continued its strong marketing efforts in overnight and deferred air services. DHL has undergone a reorganization that may allow it to use its international strength to expand beyond its nominal position in the United States.

All of the private-sector carriers have introduced information system advances, including user-friendly Internet interfaces. The carriers have also expanded logistics offerings and improved integration with customer supply chains.

The Postal Service has raised rates faster than its competitors and frozen capital investment. Even with its financial challenges, the Postal Service has introduced new tracking technology.

Outside the United States, the parcel industry is also changing. Parcel carriers are challenging traditional national postal services. In addition, governments are transforming postal services by revamping management incentives and demanding improved financial and operational results. In some cases they're discussing -- and even implementing -- privatization. They're also reducing the letter and parcel monopolies once enjoyed by state-owned post offices, changes which have resulted in more intense competition for parcel revenues and volume.

The material presented in this study is designed to show the general state of the package, parcel, and overnight delivery systems. It has been written to identify old patterns and recognize new trends so that readers will have a better understanding of the parcel marketplace. Because much of the information found in this report is in constant flux, readers are advised to contact carriers directly for the latest news, information and service options.

I.        Parcel Delivery Overview

The United States parcel industry is composed of five large competitors capable of offering nationwide service: Airborne, DHL, FedEx, UPS and the United States Postal Service. (Note 3) In addition, multi-state parcel carriers operate in the northeast, mid-west and west coast. Finally, there are numerous firms offering local parcel delivery in a single city, and at least four offering services in multiple cities from coast to coast. (Note 4)

The parcel delivery industry has seen substantial consolidation over the past four decades. (Note 5) Two firms -- Emery (now part of Menlo Worldwide) and BAX Global -- handle parcels as part of their air freight business but effectively exited the market in the early 1990's.

Two significant carriers that were important in the development of the industry have completely vanished. These companies are REA Express and Purolator Courier.

REA Express operated between 1918 and 1975 and during its heyday was the largest ground and air express transportation service. REA Express was founded as the American Railway Express Company by the U.S. government after the private express carriers were nationalized along with the nation's railroads. After World War I, the railroads were re-privatized and -- in 1929 -- 86 of the country's railroads created a private company, Railway Express Agency. (Note 6) REA then purchased the American Railway Express Company and placed it back in private hands. The name was changed to REA Express in 1970 following its purchase by management. REA Express filed for bankruptcy in 1975, a failure attributed to management decisions, strikes by employees and competition from private carriers and the United States Postal Service.

Purolator Courier operated ground and air courier services in the United States starting in the mid-1960's. Purolator was independent until its United States operations were purchased by Emery in 1987. Onyx Corporation purchased the Canadian operations and later sold Purolator Canada to Canada Post. One year following Emery's purchase by CNF Corporation, CNF closed its Purolator subsidiary due to poor finical results. (Note 7)

More detailed descriptions regarding the five major competitors are included with the Appendices at the end of this report. 

Financial Comparisons

Financially-strong competitors have three important advantages over financially-weaker organizations.

First, while parcel delivery is primarily a labor-intensive activity, those carriers with the greatest financial resources are more likely to have the capital necessary to make investments in their network, information systems and logistics assets. Carriers with the resources to offer the broadest scope of services and geographic reach can serve a wider segment of the parcel shipping market than carriers with more limited resources.

Second, financially-strong carriers have a lower cost of capital than those with weaker finances. In particular, firms that can generate most of their capital internally have the greatest advantage.

Third, financially-strong carriers can afford to wait longer for investments to pay off than weaker competitors who may require more immediate paybacks.

Exhibit I-1 summarizes selected financial measures that are useful in understanding the major parcel carriers. The table provides financial data and ratios that measure the financial strength of the five major firms and also includes financial statistics for Burlington Global and Emery to illustrate the difference in scale between carriers offering parcel delivery and those offering air freight services.

UPS is the largest domestic parcel carrier with $24 billion in United States domestic revenue. UPS's domestic parcel business is three times the size of that of the United States Postal Service, twice as large as FedEx, and nearly ten times the size of Airborne, the fourth-largest U.S carrier. DHL's U.S. parcel/air freight business is less than 1/20th the size of UPS.

Comparing the firms in terms of total revenue paints a different story. The Postal Service generates the most revenue, over $65 billion. UPS is second with $30 billion. DHL -- if one includes the revenue of its parent company, Deutsche Post -- is third at $25 billion. (Note 8) Among the remaining companies, only FedEx with nearly $20 billion generates revenue of comparable size.

For Airborne, FedEx and UPS, domestic parcel delivery is the core of their global business. Airborne, FedEx and UPS respectively generate 89%, 63% and 78% of their revenue from hauling parcels in the United States. Most of the remaining business involves international service with much of that to or from the United States. FedEx's percentage is the smallest due to its significant operations providing both heavier weight air cargo services and less-than-truckload freight services in the United States. DHL is just the opposite as most of its revenues are generated outside the U.S. The Postal Service receives the bulk of its revenue from handling letters and advertising within the United States.

UPS is the most profitable of the parcel carriers, generating $2.4 billion in profit during fiscal 2001. FedEx had a profit of $584 million in fiscal 2001, or less than one quarter of the industry leader.

The situation with DHL is more complex: DHL's profit was unknown as it was privately held in 2001. Access to profits from Deutsche Post, the current owner of DHL, are restricted. Total Deutsche Post profits of 1.6 billion Euros in 2001 came from both mail operations and private-sector Deutsche Post activities. Profits from Deutsche Post mail operations are not available to underwrite private-sector activities.

The remaining carriers had minimal profits or losses in 2001, while in fiscal 2001 the U.S. Postal Service had a loss of $1.68 billion.

The operating ratio (revenue - profit/revenue) measures the ratio of costs after taxes and revenue. Lower operating ratios indicate better operating performance. UPS's operating ratio is the best at .92. Only FedEx and Deutsche Post had operating ratios substantially less than 1.0 in 2001. The Postal Service's operating ratio of 1.03 indicates that it lost 3 cents for every revenue dollar in 2001.

UPS's shareholder equity, at $9.7 billion, is more than 60% greater than that of its nearest competitor, FedEx. Shareholder equity at FedEx is about $1 billion more than Deutsche Post. Airborne's shareholder equity is less than one-tenth that of UPS.

The United States Postal Service is unique in that it has a negative "shareholder" equity. The Postal Service's negative equity reflects a legislative break-even requirement that causes the Postal Service to seek zero profits while private-sector carriers try to maximize net income.

In fiscal 2001, the Postal Service had total operating revenues of $65.834 billion. Of this amount, $7.906 billion was related to parcels and packages: Priority Mail ($4.9164 billion), Express Mail ($0.9957 billion), and Package Services ($1.999 billion).

UPS's debt is higher than all carriers except for the Postal Service. The Postal Service's debt/equity ratio cannot be measured because it has a reported negative net equity.

The current ratio provides an indication of liquidity. Deutsche Post's figure may be misleading due to assets owned by its banking subsidiary. Among the remaining carriers, UPS and Emery appear to have the most liquidity. The Postal Service is nearly illiquid because current assets are dwarfed by current liabilities.

Overall, UPS comes to the market with the strongest financial position. It generates the largest profits, has the best operating ratio, debt-to-equity ratio, and is tied with Emery for the best current ratio. It has an AAA credit rating.

Operating Comparisons

All parcel carriers have the challenge of providing delivery services from any point to any other point in the United States. The result is that the physical processes and transportation networks they employ have significant similarities.

All carriers use hub-and-spoke systems to speed both ground and air parcels. All carriers have a primary air hub in the mid-section of the United States -- Airborne, in Wilmington (OH); DHL in Cincinnati (OH); FedEx in Memphis (TN), UPS in Louisville (KY); and USPS in Indianapolis (IN). Airborne, FedEx, and UPS all have supplementary air hubs to handle express volumes. The Postal Service also uses the FedEx hub for shipments hauled under contract.

All carriers also use local distribution centers from which carriers or drivers deliver shipments to their ultimate destinations.

The primary differences in the carrier networks revolve around the provision of ground delivery parcels or parcels designed to take from 2 to 5 days to deliver. Both UPS and the Postal Service have long-standing ground delivery service networks that handle substantial volumes. Fedex and Airborne are newer and their ground delivery networks reflect their more recent origin. (Note 9) DHL is just now developing its ground delivery network. 

There are four parameters carriers face when trying to profitably offer services:

·        Workforce characteristics

·        Variable verses fixed network

·        Integrated verses parallel networks

·        Joint verses single-line service

Workforce Characteristics

Parcel delivery carriers use unionized employees, non-union employees and contractors to deliver parcels. Different workforce characteristics impact the ability of management to control labor costs. Carriers with the highest concentration of unionized employees have less flexibility and higher unit labor costs than those that primarily use non-union or contract employees

Nearly all UPS employees who deliver, transport or sort parcels are represented by a union. Maintenance workers, mechanics and pilots are also unionized. The Teamsters are the largest union working with UPS.

All Postal Service craft employees who sort, transport and deliver parcels are represented by one of four unions (American Postal Workers Union, National Postal Mail Handlers, National Association of Letter Carriers, and National Rural Letter Carriers Association) depending on the activity. Lower level management employees (supervisors and postmasters) are represented by management associations. The Postal Service also contracts for transportation services and delivery in many rural locations.

Other carriers are organized to a limited extent. Airborne, DHL and FedEx pilots are all organized. DHL dispatchers are members of the Teamsters Union, but all other DHL employees are not organized and some DHL deliveries are done by contractors.

Airborne terminal, delivery drivers, and over-the-road drivers are all members of the Teamsters Union. Airborne's Teamster contracts are somewhat less generous than that signed by UPS. Most importantly for Airborne, contractors rather than unionized employees deliver more than half of Airborne's shipments.

The composition of FedEx delivery drivers differs for its Express and Ground Services. (Note 10) Express delivery personnel are mostly non-union employees. Ground delivery is primarily provided by contractors.

Variable verses Fixed Networks

It's hard to match delivery networks with volume on a daily basis. Costs per unit are highest when network costs are fixed but volume is low.

Carrier networks are most fixed when company assets and employees are used to provide services. The capital resources necessary to buy airplanes, build sortation hubs, and purchase delivery vehicles are substantial. All major carriers except the Postal Service run their own airlines and can be described as fixed-network operators relative to their Express and Deferred Air services.

The major carriers also have substantial sortation facility investments for both air and ground services.

The Postal Service purchases all of its air and rail transportation and most of its truck transportation under long-term contracts, so its network has variable cost characteristics. UPS contracts for substantial rail transportation to haul trailers long distances. Airborne and FedEx contract for significant portions of their inter-city truck transportation.

Carriers that employ networks using employees to transport, sort and deliver parcels have costs that are the most fixed over the short run. Airborne, UPS, and FedEx have made most of their sortation employees part-timers to create labor-cost flexibility. USPS has the least flexibility because most of its sortation employees are full-time workers.

Contracting for services is the primary means of controlling network costs. Airborne, DHL and FedEx Ground use contractors extensively for delivering parcels. For these carriers, delivery costs depend on the number of parcels that contractors deliver. Regular industrial engineering studies are used to align routes to match volumes and minimize delivery costs. 

For carriers using more fixed, employee-staffed networks for delivery, regular industrial engineering studies are used to align routes to match volumes and minimize delivery costs subject to limitations that employee contracts allow.  UPS’s industrial engineering expertise has long been a competitive advantage.

Flexibility has been important for both FedEx and Airborne. Both expanded thief ground operations by minimizing the use of new resources that would add to their fixed costs or increase fixed characteristics of their network.

Integrated verses Parallel Networks

All carriers except FedEx operate an integrated network. Integrated networks deliver all parcel products from overnight service to ground delivery service using the same set of local resources, and in some instances the same delivery routes. (Note 11)

In contrast, FedEx operates three separate delivery networks. First, it operates a network for air express shipments. Second, it operates a ground network for business delivery locations. Third, it operates a ground network for home deliveries.

FedEx uses the same inter-city transportation network for both of its ground delivery systems. By keeping its Express and Ground networks separate, FedEx has reduced the risk of having its FedEx Express delivery drivers and package sorters becoming organized. As long as Express employees only deliver air-express shipments, FedEx has argued, these employees fall under the Railway Labor Act which makes organizing more difficult than would be the case if they were considered part of a trucking operation and thus subject to the National Labor Relations Act. In 2001, the U.S. National Labor Relations Board ruled that FedEx Ground was a trucking company and thus subject to the NLRA and could now be organized piece-by-piece, a ruling which had been sought by the Teamsters.

Joint- verses Single-Line Service

Joint-line service differs from single-line service in that in single-line service a customer understands that a single firm is responsible for the end-to-end transportation, while in joint-line service a customer understands that two or more carriers will be involved in the provision of the service.   In the parcel industry, single and joint-line services are clearly marketed as such to customers.  Joint-line service requires both a transfer of the physical possession of the shipment as well as the legal responsibility for carriage.   Joint-line service requires that the origin and destination carriers negotiate terms of transfer and payment for services that the destination carrier will be paid. The prices that the Postal Service is paid for providing delivery as part of a joint-line service and some of the terms of transfer is subject to regulatory approval by the Postal Rate Commission.

All parcel carriers provide their domestic express and deferred air delivery as a single-line service. All carriers except the Postal Service and Airborne provide ground service as a single-line service as well.

Most of the Postal Service's ground parcel business with commercial customers is joint-line service. The Postal Service's retail customers are served through a single-line service with the Postal Service providing delivery to destination.

Airborne provides home delivery service to its customers via its airborne@home product. The Postal Service provides delivery using the terms and conditions specified by the Parcel Select product. Airborne's ground service is provided as a single-line service. 

Service Comparisons

Exhibits I-2 through I-6 illustrate the differences and similarities in the services offered by various carriers. Exhibit I-2 illustrates that DHL offers the most limited set of services among the competitors. FedEx and UPS offer a nearly identical set of services. Airborne's service levels are slightly lower than the two largest express services. Specialized divisions offer same-day services for all carriers. The DHL Ground service is currently in a test phase and is only available on a limited basis.

Exhibit I-3 shows the difference in carrier payment methods. The payment options available to Postal Service customers are different because payment prior to parcel acceptance is required -- all other carriers require pre-payment only for retail customers. The table also illustrates the importance of information systems: The private-sector carriers offer manifesting system software -- and sometimes hardware -- to simplify the payment process.

Exhibit I-4 depicts the different service options available from the carriers. The Postal Service offers the most limited set of services while DHL offers a more limited services than its private-sector competitors. This table also illustrates the rapid deployment of systems allowing carriers and shippers to notify recipients by e-mail about coming shipments.

Exhibit I-5 summarizes the differences in network access options available from various carriers. All carriers have pickup services. However, parcel consolidators pick up most of the Postal Service's parcels at the shipper's location. Airborne, FedEx, UPS, and the Postal Service all have branded retail centers available for parcel drop off. Airborne has retail counters in Office Max stores. FedEx has its own storefronts as well as counters in Kinko's. UPS has counters in both Staples and Office Depot stores and is in the midst of re-branding its Mail Boxes Etc. stores as UPS stores. The Postal Service has thousands of local post offices. DHL has a retail network limited to urban centers.  Drop boxes for the all carriers can be used for all services except ground delivery.

Exhibit I-6 looks at service guarantees. The Postal Service is the only carrier offering ground and deferred air services that does not guarantee transit time. The Postal Service offers methods to confirm receipt for parcels, but that system does not match the full track-and-trace capabilities of its competitors.

One of the challenges shippers have is claiming refunds. Most carriers limit the time available to claim refunds. FedEx offers larger shippers an automated system for removing freight charges when guaranteed delivery times are missed. Both Airborne and UPS have the option of charging shippers who use the web-based track-and-trace system to identify late shipments. Airborne and UPS also have guarantee restrictions for rural and residential destinations, destinations that are often difficult to reach on schedule.

II. Competitive Structure

To understand the parcel-shipping choices consumers find in the marketplace it's useful to consider how competitors match up. Highly-competitive markets offer consumers multiple suppliers of a required service with no single supplier garnering the lion's share of the available business. Markets with dominant suppliers are those in which one or two suppliers control the vast majority of the business. This section examines how years of competition have generated the relative market strength of the major competitors.

The various sub-markets in the parcel business are defined by four factors: the type of destination; the sophistication of the shipper; the delivery speed required; and the shape and weight of the shipment. (Note 12)

Type of Origin and Destination

The type of origin and destination determines delivery difficulty and the effort need to attract customers. This is typically described in a two-by-two matrix involving businesses and consumers as illustrated in Exhibit II-1.

Consumer-originating markets require a retail infrastructure or on-demand pickup capability that easily accepts individual parcels. The consumer-originating market also includes occasional small business customers.

Business-originating markets include markets where regular pickups justify a more personalized sales effort. Such markets generally involve carriers offering specific customer pricing

Delivering to consumers requires a specialized infrastructure because most consumers are not home during business hours to receive parcels. The USPS uses its standard six day-a-week network to deliver parcels and holds packages at retail post offices when recipients are not home. For small parcels, the USPS has the capability of leaving items in the mailbox unsecured. Airborne has chosen to use the USPS to provide delivery to home addresses. FedEx has set-up a separate delivery network for residences that offers Saturday, later afternoon and early evening deliveries. UPS uses its standard delivery network.

The private-sector carriers accommodate the different costs associated by charging different prices for business and home deliveries. The Postal Service does not. (Note 13) 

Exhibit II-2 illustrates the proportion of parcel volume destined for business and consumer (residential) addresses by shipping mode. This Exhibit shows that the vast majority of parcel volume is between businesses.

Exhibit II-3 provides the same statistics for the Postal Service. This table shows that the Postal Service's market differs from the private sector only in the delivery of ground parcels. The majority of the Postal Service's parcel business involves deliveries to consumers while the vast majority of all ground shipments are delivered to businesses. The proportion of business-to-business shipments for overnight and deferred air shipments that the Postal Service handles are nearly identical to that carried by the private sector.

Shipper Sophistication

One way carriers divide markets is to look at the level of personal attention customers require. In general, the larger the customer's daily shipping volume, the more personal attention the customer receives. For illustrative purposes, the parcel market can be divided into three consumer groups according to the level of required personal attention.

High Touch. Customers with the highest shipping volumes. The largest catalog retailers and electronics firms are included in this group. They are served by a dedicated sales representative who works with less than a dozen clients. The carrier often has administrative staff to cover customer service inquiries. These customers are the most likely to seek regular competitive bidding for delivery services. 

Medium Touch. Customers with substantial volume but not enough to justify a dedicated sales staff. Sales representatives serving these customers can have as many as 100 customers. Carriers provide support through call centers and the Internet. These customers negotiate discounts with carriers but are less likely to use a formal bidding process.

Low Touch. Customers with small parcel volumes. They often require access to on-demand pickup services instead of daily pickup services. Customers in this group may also use retail access points. Carriers provide customer support via call centers and the Internet, and they offer the smallest corporate discounts to these customers. Association marketing efforts are examples of service to low-touch clients.

Shape and Weight

The shape and weight of an item can affect carrier operations in two ways. First, the shape impacts the type of equipment needed in a distribution hub. Second, shape and weight affect the nature of the delivery. Competitors in the parcel industry handle four types of shipments:

Letters - Letters are items that can be sorted on high-speed automated equipment and held by an employee when delivering. Letters most often contain folded or flat documents but may contain other media in an envelope.

Packets - Packets are small parcels under 2 pounds. Because packets come in odd shapes and sizes they cannot be sorted on equipment used only for documents. Packets are conducive to delivery by the Postal Service because letter carriers can easily carry such items.

Parcels - Parcels are items over 2 pounds but under 70 pounds.

Freight - Individual items over 70 pounds. Freight may also include multiple parcels sent to a single destination. Freight shipments handled by air typically weigh less than 200 pounds while those shipped by ground transportation are far heavier. 

Exhibit II-4 illustrates the differences in marketshare across the four shape/weight categories. The exhibit indicates that the FedEx dominates the overnight letter market. However, FedEx faces intense competition in that market as UPS, Airborne, and the Postal Service all have more than 10% of the revenue. No other carrier has more than 2.5% of the letter market.

The packet market is also quite competitive. Both FedEx and the Postal Service have a little more than one-third of the market and UPS has one-sixth of the revenue generated by carriers handling small parcels. Airborne also provides serious competition by holding nearly 10% of the packet market.

The parcel market, parcels over 2 pounds, is the most concentrated of the four shape-based sub-markets. UPS earns nearly 64% of the revenue generated in the parcel delivery market.

The air freight market is the most competitive. No single carrier generates more than 15% of the market's revenue.

Differences between each carrier's focus can be further identified by overnight and deferred air parcels over 2 pounds. The average weight of parcels over 2 pounds that the Postal Service handles is less than 5 pounds, while parcels delivered by its competitors typically weigh more than twice as much.

Speed

Most carriers divide their product offerings by the speed of service to meet three different market needs.

·        First, they offer overnight service. Overnight service also contains a number of variations from early morning to late afternoon delivery.

·        Second, most carriers also offer a second-day or deferred service.

·        Third, carriers offer a deferred service related to the time required to deliver parcels by ground transportation modes. With the exception of the Postal Service, all carriers back-up advertised service commitments with money-back guarantees.

The first two options are most often provided as an "air service" and the last is classified as a "ground" service. This does not necessarily mean that the package classified as an "air parcel" actually travels on an airplane. For many short-distance shipments, the "air" service is actually performed using truck transportation.

Exhibit II-5 displays the revenue marketshare of the major air freight and parcel carriers by shipment speed for the first three calendar quarters in 2000. The exhibit shows that the overnight market is quite competitive with FedEx and UPS both generating more than 25% of the overnight revenue and Airborne holding more than 10%. The deferred market is equally competitive with both the Postal Service (USPS) and FedEx having more than 20% of the revenue while UPS has nearly 20%. In the ground market, UPS generates more than three-quarters of the revenue. UPS's next-largest competitors are FedEx and the Postal Service with 10.6% and 6.8% of the market's revenue, respectfully. Airborne's ground marketshare was zero during this period because it did not begin to offer ground service until 2001.

Shape and Speed

Exhibit II-6 illustrates revenue marketshare by shape and speed sub-markets. This exhibit shows that shape and speed sub-markets are substantially concentrated.