Macroeconomic Factors of the Package/Parcel Delivery Industry

The package delivery and transportation industries are highly cyclical, with business levels tied directly to business levels and business cycles of retailers and purchasers or producers of goods. The entire package industry experiences a huge surge in demand during the holiday months, with the Saturday before Christmas and December 23, for Express package services, being the busiest day for the entire industry. For example, FedEx transports 7.5 million packages a day on average, but in 2008 12 million packages were sent on the Saturday before Christmas and 14 million in 2009. (UPS ships 14.4 million on an average day) UPS and FedEx both hire part time and seasonal workers at their processing plants and drivers during the holiday months of November and December. UPS reportedly hired an additional 50,000 employees to meet the increased demand in 2009.

The packaging industry is heavily affected by a number of macroeconomic factors. Globalization and, specifically, international e-commerce benefits and contributes to the demand and profit of the entire packaging industry. Interruptions or restrictions to countries and their economies can greatly affect the industry. At the same time, a reduction in restrictions and political stability allows the industry to grow and expand. The package industry is especially sensitive to the prices and supply of gasoline, diesel and jet fuels. Not only because of the increase in operating expenses, but fuel surcharges are added and adjusted on a monthly basis to certain Express or International services, raising the prices for consumers. For example, between 2008 and 2009 FedEx Express prices increased by 17 percent due to an increase in oil prices (FedEx, 10-K, page 10). Other macroeconomic factors that could potentially affect this industry include legislation in the countries in which they operate. For example, environmental legislation regarding emissions and fuel efficiency could potentially cause a significant amount of unbudgeted operating expenses as transportation, both air and land, are the backbone of the industry. UPS has already proactively responded to this threat by investing in alternative fuel jets and hydraulic, hybrid-electric delivery trucks ("UPS Corporate Responsibility"). Other legislation that could potentially affect the industry is labor laws, including those that affect the Federal Aviation Administration (FAA) and labor unions.

The price elasticity of demand is extremely high in the package industry. Consumers have the two major packaging companies to choose from, UPS and FedEx, and will respond to changes between the two by using the other companies services when prices change. Other substitutes are the USPS, DHL (for international shipments), government owned and subsidized carriers abroad and small regional carriers. Another option consumers may take is to stick with the same company but choose a slower and cheaper method of delivery. UPS even stated in their SEC 10-K filing that their next day air saver and three day select shipment services experienced the biggest growth in the recession because these cheaper options are less sensitive to price adjustment (pg. 25). FedEx explicitly states in their 10-k filing that the package delivery industry is, "highly competitive and sensitive to price and services, especially in period of little or no macroeconomic growth" (FedEx 10-k, p. 12). Other indicators that the industry is has a high price elasticity of demand is by examining the operating margins and net income of the two largest package companies. FedEx's operating margin declined to 2.1 percent in 2009 from 5.5 percent in 2008, and their net income decreased by $102.7 million (p. 42). UPS, the world's largest package delivery service in terms of revenue and volume, saw their net income decrease by $85.1 million between 2008 and 2009 and their operating margin fall from 10.5% to 8.4%. FedEx saw their profits tumble and their margins erode because FedEx has the express shipping market share, a more expensive and price sensitive service, and Express shipments represents 63% of their total revenues (FedEx 2009, Annual Report). Any recession in governments where these two companies operate will affect the profits in this industry. The recent recession affected the industry more profoundly then any other economic or political events since the companies have been operating.

Since the industry is so sensitive to price and macroeconomic conditions, operations are significantly impacted in response to changes in the business cycle. In times of economic downturn and a decreased demand, companies may lay off or institute hiring freezes in their sorting facilities to accommodate the change in demand. The amount of truck drivers that are hired or contracted will be reduced. Both UPS and FedEx acquired retail outlets (Mail Boxes Etc. and Kinko's, respectively) which they can close, move to more profitable areas, and adjust part time staffers as needed. Expansion plans may be deferred until a better economic environment. This includes the purchase of new planes or renegotiating employment terms with airline mechanics, pilots, and ground mechanics when the present contracts expire. On the other hand, operation may open new facilities as the business expands into new markets.

Sources:

Bomkamp, S. (2009, November 10). FedEx Projects Busier Busiest Day. ABCNews.com. Retrieved April 1, 2010, from http://abcnews.go.com/Business/wirestory?id=9043560&page=1FedEx Corp. (2009). 10-K Annual Report 2009. Retrieved April 1, 2010, from SEC EDGAR database http://sec.gov/edgar.

FedEx Corporation. (2009). 2009 Annual report. Retrieved from http://ir.fedex.com/annuals.cfm.

United Parcel Service Inc. (2009). 10-K Annual Report 2009. Retrieved April 1, 2010, from SEC EDGAR database http://sec.gov/edgar.

UPS Corporate Responsibility. (n.d.). UPS.com. Retrieved April 8, 2010, from http://sustainability.ups.com/.

FedEx Corp.Bomkamp, S. (2009, November 10). FedEx Projects Busier Busiest Day. Retrieved April 1, 2010, from