The Cost Structure of Integrators Impacts their Strategic Behaviour

Integrators are positioned at the intersection of three subcategories within the air cargo industry, says Dr.Onghena. “General air cargo, express and postal services. So they have to compete with all the actors in these subcategories: all-cargo carriers, ACMI operators, air freight forwarders, parcel carriers and postal service operators.”  On top of this, as her research has shown, they are also faced with competition from the large maritime operators.

Control of the supply chain from A to Z
Unlike all-cargo carriers the integrators do not transport by air alone. Evy Onghena: “For them it is part of a multimodal network in combination with road transport, enabling door-to-door delivery. It is precisely this ability of integrators to control all aspects of a door-to-door logistics service that makes them essential for shippers operating in a global economy.”
Integrators are also operational both on the ‘offer’ side and the ‘demand’ side of the market as they also buy capacity from others. For the air cargo carriers flying is their sole objective. On top of that, FedEx, UPS and DHL move large volumes. “I would not call TNT a real integrator anymore, as they have divested their freight forwarding activity”, says Evy.

“All research has its limitations”
Cost structure is one of the most important determining aspects of a company’s strategy. Evy’s research was done using two tools: a ‘translog cost function’ and a ‘cost simulation model’. The former shows the cost structure and cost characteristics of the airline operations of FedEx and UPS – based on quarterly cost and output data between 1990 and 2010, while the latter focuses on the cost structure of the entire door-to-door chain of integrators.
Evy’s investigation was hampered by the fact that European companies like TNT and DHL have no legal obligation to communicate openly on their cost structure, contrary to FedEx and UPS. “I cannot simply put the cost structure of DHL and TNT against FedEx and UPS. All research has its limitations.”

Differing biz models
Not to be overlooked is the fact that UPS is, historically, a road haulier, which entered the air cargo market much later than FedEx. “If you compare FedEx to UPS, one finds that the cost of labour is the most important to both. Capital cost comes second for FedEx, for UPS it is the cost of fuel. FedEx leases more aircraft than UPS. Within the U.S., FedEx has more subcontracted operations, whereas UPS deploys its own aircraft.”
The capital/fuel ratio is substantial at FedEx, complimentary with UPS. When fuel prices go up, capital demand at FedEx goes up as well, due to the purchase of larger and more expensive aircraft. At UPS, a rise in the price of fuel, will lead to a decrease in capital demand. UPS buys fewer aircraft and switches to road transport when demand goes down.

Integrators compete against forwarders
UPS is an engineering company for the most part, with standardised operations and highly automated processes. This is reflected in the products they offer. If something does not fit into the system, it is not being forwarded through the express system.
The integrators are not only competitors within their own industry, but increasingly towards freight forwarders as well. “It is easy to offer the same products in cooperation with a subcontractor, like Eva Air and Schenker or Panalpina and Cargolux. Being an integrator has advantages and disadvantages. You have your own hub and aircraft, but less flexibility. The non-integrators are more capable of reacting to the fluctuations of the market.”

FedEx + TNT is a perfect match
Dr Evy Onghena was among the first to predict the take-over of TNT by one of the others: “They are too small to be able to compete. Their volume is too small, reflecting in a Revenue Ton Kilometre (RTK) which is far too high. In the years 2006 through 2009 they still showed a lot of ambition, especially thanks to their inland networks in China and Europe. TNT has always been a strong player in the road segment. On the other hand, they have curtailed their intercontinental flights to China etc. After the collapse of the merger with UPS, they continued on a stand-alone basis for a while, mainly as a niche player in Europe thanks to their road network. They entered into block space agreements with other carriers for the air leg.”

FedEx is the better pick, Onghena
Evy is convinced that, compared to UPS, FedEx is a far better take-over partner for TNT. “Their market share in Europe is much smaller than UPS’s or DHL’s. FedEx and TNT are complimentary.” Dr Onghena does not think that the eventual merger will have a big impact on the respective hub operations in Liege and Paris. “Liege Airport has a lot of advantages, such as the absence of restrictions, abundant capacity and the fact that the CDG hub is more susceptible to social unrest and strikes. Another consequence is, of course, that the FedEx headquarters will move from Brussels to Hoofddorp in the Netherlands. There will also be synergies in the overhead. The merger will also bring about the cultural differences between FedEx and TNT.”
Even today, the big 3 FedEx, UPS and DHL are competitors at all levels. “Globally speaking they offer the same sort of products. FedEx, however, has a larger fleet. DHL is very strong on the internationally, in fact on all levels, but will face fiercer competition in Europe after the merger of FedEx and TNT.”
A copy of Dr Evy Onghena’s thesis is available on PDF. Just contact: evy.onghena@uantwerpen.be

Marcel Schoeters in Brussels