Overnight Parcel Deliveries Are in a Box

Maybe it doesn’t need to absolutely, positively be there overnight.

Or so a good segment of U.S. industry is deciding. The growth rate of overnight U.S. parcel deliveries is slowing, based on recent figures from Federal Express and its parent FDX Corp., Airborne Freight Corp., the U.S. Postal Service and other delivery concerns.

And ironically, one of the culprits is supposed to be helping boost business for the carriers: the Internet, which is generating millions of dollars in sales of goods that need to be shipped quickly. But many documents that used to be sent by overnight air are now simply transmitted electronically.

“The overnight market is still important; it’s just not as important as it used to be,” said Postal Service spokesman Gerry McKiernan.

And rejuvenating that growth will be one of the challenges facing David Bronczek, who this week was named to succeed the retiring Theodore Weise as president and chief executive of FedEx next Feb. 1.

Weise helped start FedEx with its founder, Fred Smith, who remains chairman of FDX. Weise’s decision to retire was said to be his own. But the change came only a month after FDX stunned Wall Street by posting disappointing earnings for its fiscal first quarter ended Aug. 31, in large part because of a slowdown in its core U.S. delivery business.

Besides FedEx, Memphis, Tenn.-based FDX also owns a ground-delivery company, RPS Inc., that competes with United Parcel Service of America and others. FDX also warned on Sept. 16 that “if lower U.S. domestic growth also continues,” earnings for its full fiscal year might drop below expectations, “and FDX may not achieve a double-digit operating income growth rate for the year.”

Investors weren’t pleased, and they slashed 12% off the value of FDX’s stock that day alone. It has recovered somewhat since then and closed Tuesday at $42.25, down 50 cents for the day on the New York Stock Exchange.

Seattle-based Airborne has also struggled recently, and its stock has plunged 37% since late February. The main problem has been a “lack of growth in domestic shipments,” said Roy Liljebeck, Airborne’s chief financial officer.

Consider: At FedEx, the volume of U.S. priority overnight shipments in its fiscal year ended May 31 rose 4.1%, compared with a 6.4% gain the previous year. At the Postal Service, volume for overnight letters and small packages--such as Express Mail--grew 7% in the fiscal year ended Sept. 30, compared to 12.8% four years earlier. And growth in the current fiscal year is expected to slow further, McKiernan said.

UPS, which is planning an initial public stock offering, isn’t showing significant growth, either. In 1998, its total U.S. shipments--including next-day air and ground--were down 1.5% from their 1996 levels, as UPS also struggled to recover from a 15-day Teamsters strike that crippled the carrier in 1997 and distorted that year’s results.

But finding a solution to the slowdown in domestic overnight deliveries won’t be easy, because the companies and industry analysts can’t point to just one reason behind the downturn.

“The companies seem to be genuinely surprised with what’s going on with their volume,” said analyst Scott Flower of Salomon Smith Barney Inc. in New York. “It’s a bit of a mystery, because there’s not one answer that just pops out.”

Rather, a variety of trends are at work. For one thing, overnight delivery--pioneered 25 years ago by FedEx--is now a maturing industry with lots of competitors that cannot be expected to keep generating double-digit gains, executives and analysts said.

Also, there’s the emphasis throughout Corporate America to slash costs and the simultaneous explosion of the Internet, which helps them do exactly that: cut costs and yet still deliver documents quickly.

Many documents, computer data, photographs and other types of parcels that once were sent overnight by air can now be simply e-mailed in seconds or sent as e-mail “attachments” that can be quickly downloaded on the recipient’s computer and printed out if necessary.

“It’s the growth of the computer and e-mail communications, along with more financial cost awareness within major corporations,” said the Postal Service’s McKiernan.

There’s been a lot of hype in the last year about how the Internet--especially its electronic-commerce sector--would help boost the delivery companies’ business. More consumers are ordering products online, and so the delivery firms are expected to benefit from shipping all those boxes.

“But, clearly, what the Internet may be giving us it may also be taking away,” Flower said.

FedEx discounts the Internet as a major problem, instead pointing to an extremely low level of raw materials and other inventories at many manufacturers relative to their sales--inventories that FedEx specializes in shipping overnight along with its familiar letter-size packets.

“Growth rates in domestic are not what we would like,” said FedEx spokesman Greg Rossiter. But the low inventory level “we think is not sustainable” and later this year “will show improvement,” he said.

Airborne, which has long focused on deliveries between businesses, is following a different tactic: It believes it can pump up growth by delivering more goods to consumer households by air.

“Finding a way to serve the business-to-residential market is a key role to survival,” said Airborne spokesman Tom Branigan. In June, Airborne announced a plan to join with the Postal Service to make overnight deliveries to homes.

And there are still bright spots in air delivery--namely in international markets. In the quarter ended Aug. 31, for example, FedEx said its premium global service, International Priority, enjoyed a higher-than-expected 12% jump over the year-earlier period.

And the carriers said they expect another strong holiday shipping season this winter.