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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.
New Entrants Low Open Skies is
making it easy to enter the market Highly consolidated industry Labor problems. Capacity Suppliers constraints. Low Fuel Costs.

Rivalry Customers High


Low switching costs but customers too small to have any individual advantage.

Substitutes High

There are no real substitutes for air freight.

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 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.

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