Competition
Among large, established parcel carriers, competition is stiff. Companies like FedEx must make enormous investments—in hubs, air and ground fleets, and tracking technology— to build the networks that make their business possible. Once networks are established however, the costs of increasing package volume (variable costs) are relatively low. This feature of their business encourages parcel carriers to compete for business on any basis available.
Price is one obvious point of competition. But it is rarely an issue in the mature U.S. parcel market. In 2004-2005, as international carrier DHL's pushed to expand its U.S. market share, some observers feared that a parcel carrier price war would ensue, reducing profits for all. In fact, prices remained quite stable, illustrating that the U.S. parcel market is mature, not highly fragmented, and unfriendly to new entrants. (DHL's U.S. expansion was less successful than expected.) Carriers like FedEx are slightly more likely to compete on price in international markets, which are more fragmented than the U.S.
In its core U.S. parcel market (express and ground), FedEx has only one large competitor. The combined express and ground market breaks down as follows but FedEx has a far larger share (49% estimated) of express business and only a small share (17% estimated) of ground business. Outside of the U.S., FedEx competes with three similar carriers--UPS, DHL, TNT--and many smaller private and government carriers.
|
| U.S. Domestic Parcel
| International/Foreign Domestic Parcel
|
| FedEx
| 22%
| 7%
|
| UPS
| 48%
| 10%
|
| DHL
| 7%
| 23%
|
| TNT
|
| 11%
|
| Other
| 23%
| 49%
|
Yield, defined as revenue per package, is one important measure of a parcel carriers' business. FedEx's flagship company FedEx Express had an average yield of $21.72 in 2007, compared to UPS Next Day Air's $21.14. It is no surprise that FedEx yields are higher than UPS's. By definition, yield reflects only average price charged per package and FedEx has long had a reputation for being more expensive than competitors.
However, yield is not a perfect measure for comparison, even price comparison. Large customers negotiate prices with carriers based on the mix of services they use and expected volumes. So individual customers may find that FedEx offers the best price for them even if it is expensive on average. Further, yield is of limited value as an indicator because it does not take projected volume growth into account. The high fixed-cost structure of the transportation business means that there is often lag time between when carriers invest in network expansions and when they see resulting revenue increases (as a result of increased volumes). Profits therefore rise and fall with volume relative to the size of the companies' networks. If one company can expect more still-unrealized returns on these investments in the coming year, their positions may not be as close as their yields suggest.
Introduction and Overview | Key Trends and Forces | Competition
References
