Contemporary Developments in

Business and Management

Assignment for next class (Monday Jan
28th)

Done by: Mariam Morchid

Sunderland level 3

AIR DELIVERY & FREIGHT SERVICES INDUSTRY

The Air Freight & Courier Services industry consists of companies

engaged in air cargo and mail carriers, packaging and logistic air freight
services, postal delivery services on a contract basis, as well as land based
courier services. The Air Freight & Courier Services industry excludes
marine freight transportation, classified in Marine Transportation; and
freight storage facilities, unless specified as air freight, classified in Rails &
Roads - Freight. The industry that encompasses air freight and ground
delivery is the commercial freight distribution industry and is composed of
Trucking, Railroad, Pipeline, Water and Air Freight. In 2003, this industry
did $702 billion in sales (West, 2005). Air freight delivery companies
receive small and medium sized packages, take them to distribution
centers. It is there that the packages are consolidated and distributed into
airplanes which are then flown to destination distribution centers where
the process is reversed and the packages delivered to addressees.
Competitors that distinguish themselves successfully manage the
integration between air and ground distributions while increasing package
volumes to maintain a low cost per package.

Porters Five Forces

The purpose of this section is to describe the state of the industry using
Porters Five Forces model. The industry has been able to pass the cost of energy
in the form of fuel surcharges and price increases to their customers. New
entrants into the US domestic market are finding it difficult to find traction.

Rivalry: Figure 1 illustrates how high the industry is combined and we still
see a lot of mergers, specifically FedEx with SmartPost & Kinkos and UPS
with Messenger Service Stolica, Menlo and completing the last of UPS
Yamato. This consolidation and high concentration serves to reduce
competition for UPS and FedEx as it turns the industry in a monopolistic
one. What keeps the competitive rivalry high is low switching costs for
their customers, a fact DHL learned when their performance suffered from
a September hub consolidation. Customers wasted no time and brought
their business to UPS and DHL, and some that were interviewed said that
they may not return to DHL. Those who did most likely demanded
discounts (Valentine, 2005).

Threat of Substitutes: There is currently no substitution for sending

packages. Even if manufacturers put a factory within a few hours from
their customers, there is no substituting the channel. Currently, UPS and
FedEx are making themselves even more integrated with the expansion of
their Supply Chain businesses.

Buyer Power: The air freight industry is supplying an increasing portion of

the economys supply chain infrastructure, decreasing buyer power.
Buyers are highly fragmented. With the exception of large customers like
Amazon.com and catalog retailers, most customers do not have a large
percentage any one companys revenues.

Supplier Power:Labor unions pose a threat to profitability in this industry.

Pilots and drivers are both applying pressure to increase wages. In some
companies, union workers are without a contract, such as UPS pilots (UPS
2004) and if not addressed could result in a reoccurrence of the 1997
Teamster strike. FedEx is also susceptible to challenges of its power with a
class action lawsuit that could convert its Ground drivers from contractors
to employees. The government is also reducing the industrys capacity
with a new rule from the Federal Motor Carrier Safety Administration of the
US Department Transportation. This new rule says a driver can be behind
the wheel for 11 hours instead of 10 hours, but that same driver must take
off 10 hours between shifts instead of 8 hours. This change reduces work
hours per day from 14 hours to 15 hours and will cost the industry over $1
billion (Standard & Poors, 2005).

New Entrants: A significant barrier to entry is regulated air carriers and

the reduction of this barrier through the Open-Skies program managed by
the US Dept of Transportation. Beginning in 1992 with Netherlands, the
Open Skies program creates a free market for aviation services, notably air
freight companies (US Dept of State, 2005). It was in 1996 that the US
and Germany agreed to an Open Skies agreement for what was called a 7th
Freedom All-Cargo Rights. What this means is that an airline of one
country, say DHL of Germany, can operate cargo services between the US
and any other country without having to use Germany as a hub. This
agreement substantially reduces the barrier to entry for UPS and FedEx,
while also opening up new markets for them. The one glaring issue for US
air freight companies is that places like Germany and Pakistan arent the
most desirable air freight markets for US companies, but the reverse is
definitely not true as well funded companies like DHL now have the largest
air freight market open to them. Countries like Taiwan and Korea have
Open Skies agreements with the US but do not have 7th Freedom All-Cargo
Rights, which keeps these markets protected from UPS and FedEx.

United Parcel Service (UPS)

UPS is a global company
with one of the most
recognized and admired
brands in the world. They
have become the world's
largest package delivery
company and a leading
global
provider
of
specialized transportation
and logistics services.
Every day, they manage
the flow of goods, funds,
and information in more
than 200 countries and
territories worldwide. UPS
is seeking to integrate
into freight with larger haul
trucks and it is adding
capacity in Asia and Europe with acquisitions of Sinotrans, a Chinese joint venture
and Stolica, a Polish parcel and express company.
UPS is the 11th largest airline world, with nearly 600 planes, 15 airport hubs
worldwide and 900 airports served. Connecting these airports hubs to customers
are 1,750 distribution facilities that sort packages into 90,000 trucks for
deliveries to the home, office, and 72,000 retail outlets. All this requires the
integration of air, ground, logistics and trade financing that UPS maintains is a
key competitive strength. UPS is the nation's 3rd largest employer with nearly
400,000 employees worldwide.
UPS is targeting a global market of producers and consumers, while making a
move to become the supply chain integrator of choice in ecommerce. They offer
Express, Ground, Freight, and Supply Chain services common to market
participants at this level, plus offering supplementary financial services such
Letter of Credit and credit card operations through UPS Capital. UPS offers
products and services that are state of the art in logistics, which include the use
of bar codes and RFID, high speed package routing systems, and consulting
services. UPS charges package prices that are in alignment with the industry and
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is willing to raise prices alongside FedEx. It has been able to charge fuel
surcharges successfully.A sales force is maintained to reach business customers
and producers crucial to UPS mission in expanding its role in logistics to become
the supply chain integrator of choice.
Major domestic (United States) competitors include United States Postal Service
(USPS) and FedEx. In addition to these domestic carriers, UPS competes with a
variety of international operators, including Canada Post, Purolator, DHL Express,
Deutsche Post (and its subsidiary DHL), Royal Mail, Japan Post, India Post and
many other regional carriers, national postal services and air cargo handlers.