The U.S. parcel market underwent a shift in Q1 2022 as year-over-year average daily parcel volumes dropped for the two largest third-party parcel carriers. FedEx reported a 0.1% drop for its fiscal third quarter that ended February 28, while UPS reported a 3.0% decline year-over-year for its first quarter that ended March 31.
The omicron variant, high inflation, a surge in energy prices, COVID-19 lockdowns in Asia, and geopolitical uncertainty contributed to the average daily parcel volume declines.
However, neither company seemed too concerned about the parcel volume declines. The average revenue per piece increased 9.3% to $10.62 per parcel for FedEx, while UPS's average revenue per piece increased 8.4% to $10.66 per parcel. "Our success was driven by continued gains in revenue quality and by leveraging the agility of our network to control costs," UPS CFO Brian Newman told analysts. Indeed, FedEx also noted strong revenue quality for its quarter.
Both carriers' "revenue quality" is attributed to annual rates implemented in January (FedEx) and late December (UPS), along with higher surcharges, including the recalculation of their fuel surcharge tables due to higher diesel prices.
In addition, both carriers have invested heavily in automation to improve efficiencies and reduce their costs.
According to FedEx CEO Raj Subramaniam, enhanced sortation technology is being deployed in sorting facilities and "will increase upstream efficiencies, enabling managers to do better balance and planned sortation operations, thereby unlocking key capacity. For example, during Cyber Week, this technology helped keep 1.9 million Ground economy packages out of constrained sorts."
Also, FedEx is improving upon its optimization technology already implemented "to enable service providers to make real-time decisions that enhance their business' daily efficiency."
Meanwhile, UPS is bringing online two automated hubs— in Pennsylvania and California—and rolling out RFID tagging for each package, automated bagging and labeling, and robotic small sort induction. "The investment s we've made in our automated facilities coupled with our productivity improvement initiatives enabled us to eliminate more than 1,300 trailer loads per day, compared to the same period last year, which contributed to the positive operating leverage in the quarter," Newman said.
As FedEx and UPS invest in operational efficiencies to lower their cost to serve, is there more to their decline in average daily parcel volumes? It's quite possible that they're feeling the impact of shippers diversifying their last-mile carriers.
According to parcel consultant Nate Skiver, regional carriers have been adding capacity and expanding coverage areas while new market entrants and delivery orchestration platforms are attempting to add capacity to the market by leveraging unused first, middle, and last-mile assets.
Regional carriers LaserShip and OnTrac merged in late 2021 and are currently offering transcontinental services, delivering from one coast to the other. According to a recent webinar, the "middle part" of the combined company's service area will be filled out in 2023, with new offices opening in Texas and Chicago.
Meanwhile, newcomers such as AxleHire, ShipVeho, OneRail, and GoShare are bringing last-mile technology capabilities to shippers allowing them to manage their last-mile requirements, provide visibility and mitigate costs.
In addition, many are expanding service areas. For example, AxleHire recently announced it had expanded into Washington DC and Baltimore, giving it a presence in three of the five most populous East Coast cities. AxleHire now has last-mile operations in 16 of the top 25 metro areas in the U.S.
Amazon's Q1 loss of $7.6 billion is undoubtedly an eye-opener, but it noted that labor and physical space were no longer the bottlenecks they were throughout 2020 and 2021. CFO Brian Olsavsky told analysts during the company earnings call on April 28 that "now that demand patterns have stabilized, we see an opportunity to match better our capacity to demand."
This balancing may have led the company to introduce 'Buy with Prime,' which will initially be available only for merchants using Fulfillment by Amazon (FBA) and will roll out through 2022 as merchants are invited to participate, including those not selling on Amazon or using FBA. According to the press release, the service will offer "fast, free delivery, a seamless checkout experience, and free returns on eligible orders. Prime members will see the Prime logo and delivery promise on eligible products in merchants' online stores, which signals the item is available for free delivery, as fast as the next day, with free returns." Perhaps this may be the beginning of Amazon as a third-party delivery provider?
According to UPS, parcel volume growth in the first half of 2022 will most likely be negative before turning positive in the year's second half.
FedEx expects B2B parcel growth to be healthy for the year. However, it modified its B2C expectations, estimating an 8.3% CAGR through 2026 instead of the 10% it previously expected due to lower consumer demand.
UPS and FedEx will continue to focus on profitable growth and, as such, will likely focus on B2B parcel volumes while other parcel players look to the B2C parcel market to expand their presence.For more insights into the latest supply chain industry news and trends, follow the Intelligent Audit blog.
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