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Express cargo’s big shift

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The express air cargo market is fundamentally changing. For decades, particularly in the US domestic market, the bread and butter business of UPS and FedEx was moving packages from business to business (B2B) on an expedited basis. Most of the deliveries were moving from major metropolitan area to major metropolitan area and were often clustered together. A UPS or FedEx driver could, very realistically, make five deliveries to five offices on the same floor of an office building.

But retail e-commerce—made possible by the likes of FedEx and UPS—is now booming and showing no signs of slowing down, and the express cargo companies are scrambling to keep up with the monster they helped spawn.

UPS CFO Richard Peretz recently noted that UPS is carrying “historic levels” of business-to-consumer (B2C) cargo. In fact, he said, B2C made up 63% of the volume of UPS’s deliveries in December. So UPS’s primary business is rapidly becoming deliveries from retail outlets to the front porches of consumers who are ordering more and more merchandise online.

But the profile of the average B2C delivery is quite different from the average B2B delivery. B2C pays less—while businesses often need items overnight, a delivery time of two or three days is usually fast enough for most consumers, who are not looking to add too much in costs to their online orders. Average revenue per piece was down year-over-year or flat in every category of UPS’s package shipping business in the 2016 fourth quarter, and down 0.8% on a consolidated basis in the quarter.

And B2C costs more to deliver than B2B—sometimes much more. Instead of deliveries to offices clustered in the same building or on the same city block, a driver might have to travel to as few as two or three deliveries located many miles apart in a rural area.

Peretz said UPS is in “mid-cycle” of a multi-year transformation to adjust to the new reality.

UPS’s test this month of a drone that launched from the rooftop of a delivery truck and carried a package in a residential area before returning to the truck, which had continued on to another delivery, is part of the evaluation process UPS is going through to determine how to traverse this new express delivery era. “Imagine a triangular delivery route where the stops are miles apart by road,” UPS SVP-global engineering and sustainability Mark Wallace said. “Sending a drone from a package car to make just one of those deliveries can reduce costly miles driven.”

Add to the mix the fact that Amazon has contracted its own branded Prime Air fleet of 40 Boeing 767-300Fs (operated via wet lease by Atlas Air Worldwide Holdings and Air Transport Services Group), and you have a dramatically shifting express cargo landscape, especially in the US. Amazon recently announced it was investing $1.5 billion to establish its own air hub at Cincinnati/Northern Kentucky International Airport (CVG) in Hebron, Kentucky, suggesting the online retail giant envisions the Prime Air network continuing to grow—meaning Amazon will rely less on FedEx and UPS and, long term, Prime Air may even be a competitor to those carriers.

The announcement of the air hub came on the heels of fast-growing Amazon adding 23 new warehouses in the second half of last year alone. Amazon CFO Brian Olsavsky recently told analysts that the CVG air hub will “create thousands of jobs over time” and “gives us a base for future growth.”

The e-commerce explosion certainly creates new opportunities for express cargo delivery. But it does not come without costs and challenges that UPS, FedEx, Amazon and the cargo carriers contracted by Amazon will have to navigate.  

“Today you’re seeing the smaller brown boxes that are appearing on all of our doorsteps, whereas in the past it was a different type of cargo that was moving through,” Atlas Air Worldwide president and CEO Bill Flynn told analysts last week. “So there is absolutely a shift occurring.”

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