Depending on how the holiday season pans out, FedEx Corp. and UPS Inc. will get close to $200 billion in combined annual revenue by the time they finish their reporting years: UPS’ on Dec. 31 and FedEx’s the following May 31. It stands to reason, then, that a merger of regional parcel delivery carriers LaserShip and OnTrac, with $1.7 billion in combined annual revenue between them, wouldn’t appear on the giants’ radar.
Vienna, Virginia-based LaserShip’s mid-October $1.3 billion purchase of Chandler, Arizona-based OnTrac will forge the first nationwide provider built from regional networks. The deal has generated much excitement in the last-mile delivery world. It is also welcome news to big parcel shippers that have spent 18 months coping with persistent demand spikes, ultratight capacity and demands by FedEx (NYSE: FDX) and UPS (NYSE: UPS) to accept higher rates and surcharges, or be volume-restricted if not cut loose altogether.
There are deep pockets behind the tie-up in the form of private equity firm American Securities LLC. Will Manuel, an American Securities managing director who is also LaserShip’s chairman, has high aspirations for the entity in a delivery world turned upside down by the COVID-19 pandemic. Manuel backed it up last month by hiring Mark Holifield, who ran Home Depot Inc.’s (NYSE: HD) logistics and supply chain operations for 14 years, as the combined entity’s CEO.
However, some perspective is needed before the coronation begins. The LaserShip-OnTrac entity equals just 3% of FedEx’s and UPS’ combined volumes and only 1.5% of combined revenue, according to consultancy Shipware LLC. Regional carriers, including LaserShip and OnTrac, are already at or near full capacity, and it’s uncertain at best how much of FedEx’s and UPS’ share they could take and still adequately service the accounts, Shipware said. “If [LaserShip/OnTrac] doubled in volume capacity — which they can’t for a very long time — they’re still insignificant” compared to the behemoths, said Rob Martinez, Shipware’s founder and co-CEO.
FedEx and UPS, if need be, will sow shipper doubt about diverting volumes to the merged entity, citing inferior technology and the lack of a bona fide national network that can scale to meet shippers’ multiple needs. However, the ace in the hole for the big boys is their customers’ fears of losing volume discounts should they shift even some of their business. Many FedEx and UPS contracts include exclusivity and early termination language, and carrier discounts and rebates are based on volume and continued exclusive use, according to Martinez.
“Try diverting 20% of your traffic to save 5% with the regionals and watch your costs rise 10% on the remaining 80% of the volume that stays with FedEx and UPS but misses [the] maximum revenue incentives,” he said.
Kelly Picard, CEO of Hackbarth Delivery Services Inc., a regional carrier based in Mobile, Alabama, agreed that even in aggregate the regionals are Lilliputians in the land of the twin giants. Still, cost-conscious e-commerce shippers love doing business with the regionals because they generally receive more favorable pricing, Picard said. They also value the regionals as safety valves should FedEx and UPS continue to impose volume limitations, she said.
The conventional wisdom is that regional carriers offer competitive rates because of their relatively low overhead. That may be true up to a point. Picard said, however, that the regionals actually don’t serve all ZIP codes in their territories, and instead “cherry-pick” those ZIPs with strong volume density and short transit times. This allowed the carriers to deliver more packages within specific time windows, and at attractive rates and fewer delivery surcharges. The efficiencies generated by these routes are effectively passed on to the shipper, which explains why the regionals’ price-service proposition can be appealing, she said.
BEFORE AND AFTER
Last year became a “before and after” moment for parcel delivery. Less clear is whether the wrenching changes made regional carriers — and especially the promise of a national network — more enticing. That didn’t appear to be the case pre-pandemic. In 2018, Shipware surveyed shippers with a collective $2.5 billion in annual parcel spend. The survey found that 74% were not using regional carriers, and just 7% were engaged with them in a significant way. More than two-thirds of respondents single-sourced to FedEx or UPS, and 70% said it would be too hard to switch because of the operational cost and complexity. About 26% said they increased their use of regional carriers in 2018, though nearly half said they would engage more frequently during 2019. About one-third said they used regionals because of their service, and they received no cost benefits over what they paid UPS and FedEx.
Any impact of the LaserShip-OnTrac combination on UPS and FedEx is a story that has years to play out. History, however, offers a cautionary tale. In March 1998, UPS controlled 64% of pick-ups in the U.S. ground parcel market, which at the time was dominated by business-to-business (B2B) deliveries, according to SJ Consulting, a consultancy.
That month, FedEx closed on a deal announced the prior October to acquire Caliber System Inc., whose Roadway Package System (RPS) unit had been quietly nibbling at UPS’ competitive position for 13 years. Using the relatively small RPS as a springboard, FedEx built a formidable U.S. ground-delivery unit, which became known as FedEx Ground, to challenge UPS.
By 2020, UPS’ share of the total ground delivery market had fallen to 35%, according to SJ data. FedEx, which held a 9.8% share in 2000, controlled 20.4% of the market by 2020, according to the firm’s numbers. The market share changes have been skewed by the growth in e-commerce fulfillment, which tilted delivery volumes to the more competitive business-to-consumer (B2C) segment, and the emergence of Amazon.com Inc. (NASDAQ: AMZN) as a delivery player. Amazon has taken significant share from UPS since it launched its delivery network seven years ago. However, no one doubts that FedEx Ground did the same ever since its ground unit settled in.
Satish Jindel, SJ’s founder and CEO, and an adviser to FedEx on the Caliber deal, said UPS believed at the time that RPS was too insignificant to warrant much attention. Two-plus decades of share erosion in its core business have taught UPS not to repeat that behavior if and when a new model walks on the field, Jindel said.
The FedEx-UPS duopoly existed in the B2B world, where delivery schedules, routes and behaviors were predictable and plain vanilla, Jindel said. E-commerce and B2C fulfillment is what Jindel called “31 flavors,” meaning there are many ways to skin the cat. FedEx and UPS have far from perfected deliveries in this world, and therein lies the chance for the merged entity and for regional carriers to make inroads, he said.