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Nightmare on parcel street opens historic window for regional carriers

Large volumes seem headed regionals’ way as FedEx, UPS shed major business. Are they up to the task?

What if the regional parcel carriers threw a party and everybody came?

That may yet come to pass, based on the unprecedented changes shaking the U.S. parcel-delivery industry. Since March, all parcel carriers have been slammed with record volumes from spikes in e-commerce activity. The peak holiday shopping season, which effectively began last week with Inc.’s (NASDAQ:AMZN) record two-day Prime Day bonanza, has poured fuel on the fire.

Parcel capacity during peak season will be scarce and expensively priced. FedEx Corp. (NYSE:FDX) and UPS Inc. (NYSE:UPS) will slam big shippers with delivery surcharges that could be as high as $5 per package. Big regional parcel carriers like OnTrac, LSO and LaserShip have stopped accepting peak business and are focusing on first-quarter order books that are rapidly filling up. DHL E-commerce, the e-commerce unit of German giant Deutsche Post DHL, stopped taking peak business Sept. 1. Amazon is scrambling to add 50% more peak facility capacity just to keep up. 

“We will have a second peak, and it’s called the first quarter” said Richard Metzler, CEO of LSO, an Austin, Texas-based carrier that serves every address in Texas and most of Oklahoma. 

Beyond the holidays and even the COVID-19 pandemic, however, is a shift of epic proportions that could set the regionals’ course for years. According to interviews with carrier executives and industry consultants, FedEx and UPS, hungry for fatter margins as long as the supply-demand scales tilt in their favor, are forcing their largest shippers to accept double-digit contract rate increases or find delivery alternatives. UPS is also capping the volumes it accepts from big customers, and some of its long-standing shippers are being abruptly informed to shed 20% to 30% of their pre-peak traffic that they tender to the carrier, according to Metzler. Neither carrier “is trying to finesse” their actions, he said.

Mark Magill, vice president of business development at OnTrac, a Phoenix-based carrier that serves eight Western states including California, said he’s heard from colleagues and prospective customers that “UPS is giving (customers) 30- and 60-day notices that they will no longer do business with them.” Magill said big shippers at both carriers are receiving rate increases in the 30% to 50% range, adding that the magnitude of the increases is “no exaggeration.”

Added John Haber, CEO of consultancy Spend Management Experts, FedEx and UPS “are holding their customers hostage right now.”

Horror stories abound. Rob Martinez, co-founder and CEO of parcel consultancy Shipware, LLC, said he knows of one shipper with a $70 million annual parcel spend who was told by one of the carriers–Martinez did not identify the carrier–to shed 90% of its volume. The level of dumped business was subsequently renegotiated, Martinez said. 

Shippers now in hot water with the carriers typically tender freight that’s costly and difficult to handle, Martinez said. In addition, the biggest customers are not profit centers for the carriers because of the significant price discounts they already receive, he said. In an extreme sellers’ market for parcel services, FedEx and UPS can either jack up rates on such traffic or refuse the business altogether.

The U.S. Postal Service has not put caps on available parcel business that falls under the non-monopoly competitive segment. That could be a palliative, but to what extent remains to be seen.

Put up or shut up

For the regional carriers, the unfolding scenario could result in an unprecedented abundance of business for years to come. Volumes that would have taken until 2025 to reach could be attained during 2021, experts said. Yet the enormous bounty will come with risks attached. The regionals will need to ensure they can keep up with the business without compromising the integrity of their networks. They also must be selective in the business they accept to avoid the low-margin morass that FedEx and UPS found themselves in. Most of all, they will need to hit their delivery targets during the all-important peak period. 

There is a lot at stake: Some shippers accustomed to partnering with FedEx and UPS will be in unfamiliar territory. In addition, shippers could risk losing discounts they get from the big carriers based on the volumes they tender. Regionals will need to provide the price-service combination that neutralizes those concerns, experts said. Carriers like OnTrac and LSO, which have their roots in business-to-business (B2B) deliveries, have in recent years shifted their focus to the business-to-consumer (B2C) segment in order to follow the demand. With that potential, however, comes the elevated demands of retailers and consumers.

“If the regionals do well, then shippers will feel confident to give them additional business. If they don’t perform, maybe shippers will think that they’re not ready to handle more traffic,” said Rick Miller, director of strategic solutions for Green Mountain Technology, a parcel consulting firm.

The regionals have a solid reputation of reliably serving their territories with one- to two-day delivery services, mostly by ground but sometimes by air. Because of their lower overhead costs, they often undercut FedEx and UPS on rates and on add-on charges known as “accessorials.” Their information technology has improved in recent years, and they are deepening their capacity capabilities to handle increased volumes.

OnTrac is adding 20% capacity for peak, but will maintain those levels once the cycle ends rather than withdrawing it, according to Magill.  It has added a delivery facility in southern California, and will build a fully automated package sortation hub there in 2021, Magill said.

Calling LSO’s growth plans in Texas and Oklahoma “an inch wide and a mile deep,” Metzler said his company will focus on “additional scalability within what we do now.” LSO was building up its network long before the pandemic hit, he added.

John Richardson, vice president of supply chain consulting at Transportation Insight, LLC, a consultancy that works closely with parcel shippers and carriers, said OnTrac in particular delivers a superior service within its region than either FedEx or UPS. The big boys have been hampered by service issues due to the unforeseen tsunami of demand, Richardson said.

Depending on the pick-up point, OnTrac next-day delivery network stretches as far as 850 miles, according to Magill. By contrast, UPS and FedEx Ground, FedEx’s ground-delivery network, deliver up to 200 miles the next day, he said. The size of OnTrac’s network makes the “regional carrier” sobriquet somewhat of a misnomer. About 65 million people live within its territory, and its system extends 1,600 miles at its farthest points, which are from Tucson, Arizona, to Ferndale, Washington on the northern border with Canada. 

For years, the regionals have mulled the potential of stringing together a national delivery network to rival that of FedEx and UPS. Those discussions have come to naught over issues ranging from IT incompatibility to the costs of adding resources to implement the measure. That doesn’t mean, however, that the regionals can’t establish a reasonable facsimile. Increasingly, shippers with distribution centers outside of a regional carrier’s territory are using line-haul entities to ship large parcel volumes into a regional carrier’s hub, where they are then inducted into the facility for the final delivery. This gives the shipper a form of nationwide distribution without the need to invest in additional physical facilities, regional carrier executives said. 

In addition, the rapidly changing nature of retail fulfillment and distribution is forcing shippers and retailers alike to add centers that will be closer to end customers, as well as to regional carriers.

For parcel shippers, there are two takeaways from this critical juncture in the industry’s history, according to Magill. The first is to have robust multi-carrier software so they can find other carriers if their shipping is threatened by their existing carrier. Shippers “are sitting ducks without this capability,” he said.

Second is to never sign exclusive carrier contracts, Magill said. “I’m sure the shippers that were kicked to the curb, and I am referring to the very largest shippers, wished they had diversified their carrier mix a year ago,” he said.

The FREIGHTWAVES TOP 500 For-Hire Carriers list includes FedEx (No. 1) and UPS (No. 2).

Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.