The last 12 months have been somewhat colourful for the big brown box company. United Parcel Service has launched a charter passenger service; expanded its operations in Asia and strengthened its position in Europe; completed a programme in which its entire jet fleet has been brought up to Stage 3 noise reduction standards; and begun to equip its Boeing 727s with head-up displays.
In the middle of all this came a highly publicised strike by ground workers - the company's first - which catapulted the privately owned company into the public eye and put it at the forefront of a perceived sea change in US labour relations. Now UPS pilots are hoping to gain public sympathy for their own pay dispute with the company.
Despite this surge of events, Tom Weidemeyer, president and chief operating officer of UPS Airlines, can afford little time to look back. The rapid growth that the company and the industry is seeing, especially in the express and international markets, requires a sharp focus on the future. And UPS likes to look far into the future. 'They take a real long-term view,' says Lee Hibbets at consultants Air Cargo Management Group in Seattle. 'They are like the Chinese. They think really, really long-term.'
This type of thinking is guiding UPS' overseas strategy and has seen its international express traffic volume, in shipment terms, grow by 21 per cent between mid-1995 and mid-1996 - ahead of all its competitors. UPS reported revenues of $22.37 billion and net income of $1.15 billion for calendar 1996, compared to revenues of $21.05 billion and a net income of $1.04 billion in 1995. The fastest growing segments of its business are the express and international markets, whose revenues leapt by almost 25 per cent last year.
'The express market is growing fastest of all,' says Wiedemeyer. 'In today's business environment, speed is everything. People want the overnight service.' UPS is attempting to meet the demand for faster and faster service throughout the world, but tailors its operations to fit each region.
In Europe, UPS has invested substantially in creating a hub in Cologne that is the European equivalent of its main hub and headquarters in Louisville, Kentucky. Despite the high labour costs associated with a German operation, UPS seems pleased with the way the hub is developing.
But Weidemeyer stresses that he still regards UPS as 'one of the emerging players' in Europe, hinting that the company is prepared to wait for the paybacks. 'We are well positioned because of the combination of our air and ground services,' he says. 'Cologne is where we intend to stay. We have invested a lot of money in that hub and just extended it with a new automated sorting facility.' The breaking down of border and customs barriers through the European Union is helping, he says, by allowing UPS to provide more timely service.
Hibbets says this patient attitude towards establishing business in new regions sums up the different approaches of UPS and its chief rival, Federal Express. 'FedEx is seen as more aggressive, whereas UPS is a little bit more methodical and long-term,' says Hibbets. 'FedEx went hard into Europe in the 1990s and got burned badly. FedEx is traditionally an air system company and tried to superimpose that in Europe, ignoring the excellent ground transportation system that already existed there. UPS' roots are in the ground, and the air system was developed later to broaden the product line for shippers.'
'They saw that in Europe there was no need to transform most of the system from ground to air; they did not try to transplant an American company into Europe. They were willing to make upfront investments and take small losses to establish themselves on European terms. It's kind of remarkable that this trucking company of the US can be something different in Europe.'
In the UK international express market, the strategy is paying off. According to a recent survey by UK-based consultants Triangle, UPS has become the second most popular carrier for both documents and parcels. DHL maintains a strong first place, but Triangle says UPS is continuing to challenge that lead, while FedEx trails in fourth place after TNT.
Waiting game
UPS is now playing the same sort of waiting game with Eastern Europe. 'Eastern Europe is really a receiver of goods at the moment,' says Wiedemeyer. 'We were one of the first to be able to offer service to all points in East Germany. We would like to grow the business there, to the extent that it is possible in the different countries, and we would like to be a leader in the market in terms of service offerings.'
The same softly, softly approach is mirrored in the Asia-Pacific region, but here UPS faces much more serious competition from FedEx, which has concentrated a large portion of its international growth strategy in Asia. According to Wiedemeyer, the pieces are still being put together for its new Asian hub in Taipei. 'We looked at Asia and realised that the one thing that is obviously different is the geography. There are no roads; you have the choice of air or boat. So we have set up localised delivery operations everywhere that we operate and that feed into Taipei. The difficulty here, such as in Hong Kong, is where do you go? It is very localised. But Taiwan is a good base from where we can spoke out, as well as come back to the US.'
FedEx has three major advantages over UPS in Asia. Its air-based system is better suited to Asia than Europe. It is the only US all-cargo carrier with fifth freedom rights in Japan (although attempts to use these rights have been blocked by the Japanese), and it is the only US all-cargo carrier with route authority in China.
Still, UPS has made use of recent open skies accords with countries like Thailand and the Philippines and began services to both Bangkok and Manila in recent months. A loosening up of the US-Japan cargo bilateral has also enabled UPS to step up service to Japan by two daily flights. Wiedemeyer would welcome more. 'Our position has always been, and continues to be, that we welcome open skies. We continue to encourage our government along that path,' he says.
China - which some analysts believe has potential for a $2 billion express market - is clearly not out of UPS' sights, even though it is technically inaccessible for now. 'As time goes on, those markets are starting to emerge,' acknowledges Wiedemeyer. 'There is great potential. But in a way, we are already there in that we fly to Hong Kong.'
The Latin American market is where Wiedemeyer seems most cautious. Even though he led UPS into that market, he clearly has doubts. 'Central and South America have tremendous potential,' he says. 'But it has been traditionally very, very difficult to do business there because of the many import/export rules they have. There is a tremendous market, but you can never be quite sure when they will be ready.'
Commercial agreements
With the exception of Puerto Rico and Mexico, UPS does not serve this region with its own aircraft but through agreements with commercial carriers, both US and South American, that mainly operate out of Miami. Hibbets believes this caution is justified. 'That market is clearly exciting,' he says. 'But if you compare the populations with Asia or North America, the gross national products and the traffic patterns for trade and air service, you find that even if growth is very high, the whole market is still very small and dominated by the north-south market. UPS is able to serve those routes through partnerships and interlining.'
'All markets are challenging in their own way,' says Wiedemeyer. 'Sometimes it's a business challenge, sometimes it's cultural. Unlike in the US or Europe, UPS is not a household name in other parts of the world. The fact that we provide efficient service 24 hours a day may not be known - we have to establish our name.'
Ironically, that may have been the silver lining of the cloud that loomed over UPS for 15 days in August when employees of the Teamsters union, which represents the company's US ground workers, went on strike. If anything positive can be said about the history-making strike, acknowledges Wiedemeyer, it is that more people around the world may have become familiar with the UPS name as a result of the strike publicity.
Wiedemeyer says he is still unsure how long it will take to recover fully from the effects of the strike. 'One would think we have to be there relatively soon,' he says of the backlog. Winning back lost customers will take longer, however, and shoring up company morale perhaps longer still. 'Any time there is a strike it has an impact on labour relations. And this was uncharted ground for us,' he says. 'People lost paychecks. Customers lost faith is us. Business won't be the same anymore.'
Wiedemeyer says he was not surprised that the majority of UPS pilots supported the strike by refusing to fly, and it is clear the relationship between management and the pilots' union, the Independent Pilots Association, remains tense. At presstime, votes were still being collected from IPA members on whether to reject a pay deal that would increase a captain's average salary by 34 per cent to $202,000 by 2002.
Wave of public support
The pilots are expected to reject the offer on principle, in order to ride on the wave of public support garnered by the Teamsters throughout the US and put UPS management under pressure to head off a second strike in six months, particularly with the lucrative Christmas period at stake. Neither side is commenting officially until the vote is known, but one UPS manager says he thinks the pilots acted 'shamelessly' in their attempt to obtain leverage from the Teamsters' action.
Strikes are not needed to boost name recognition in the US. In its 90 years of operation UPS has become a household name, largely due to the 157,000 brown trucks and vans constantly seen on US roads. The air operations group is relatively new - its tenth anniversary comes in February - and small, accounting for about 13 per cent of UPS' business.
But that percentage disguises the sheer size of the air operations group, which has a fleet of 206 aircraft, plus 21 more Boeing 757s and 767s on order, and access to more than 300 chartered aircraft. Daily, the airline flies almost 1,000 US domestic and 600 international segments to 391 US and 219 international airports. Louisville, in which UPS made a $500 million investment, is at the centre of this flight activity but there are also US regional hubs in California, Illinois, Pennsylvania, South Carolina and Texas. The regional hubs are geographically scattered around the US so that packages spend as little time in the air as possible. To improve year-round reliability, the airline has kicked off a programme this year that will see all of its 59 Boeing 727s equipped with head-up display units. 'In this business, it goes almost beyond reliability to criticality,' says Wiedemeyer. 'There is only one launch, and if you miss that then you miss it. The HUDs will help us get even higher reliability.'
Wiedemeyer has brought innovation, UPS-style, in two major ways to the airline group. First, he has overseen a programme in which the airline's entire fleet has been raised to meet Stage 3 noise requirements, three years ahead of the 1999 US compliance deadline. A hallmark in this programme was the decision to replace the original engines on the 727-100s with Rolls-Royce Tay engines - another $500 million investment - rather than opt for mere hushkitting. Again, it came down to long-term thinking. 'It was a two-fold commitment,' says Wiedemeyer. 'First, there was the environmental issue and the communities we serve. Most of our planes fly in the middle of the night. We knew what the rules were going to be, so why wait? Second was the operational issue. We were looking for a payback as well and the Tay allowed us to quieten those aircraft substantially below what any hushkit could do. At the same time, they are more fuel efficient and more reliable engines. We saw it as a pretty good deal for us. We now plan to fly these aircraft for many more years.'
The other Wiedemeyer innovation was to get into charter passenger service, something which he admits is a 'demonstration project', but which might prompt the company to buy some new dual-role aircraft in the future. UPS now has five 727s that have been converted to dual cargo/passenger roles. On Fridays, the cargo bins slide out and 113 passenger seats roll in during a three-hour transformation process. Vacation Express, an Atlanta-based travel agency, then charters the aircraft, complete with UPS pilots, for weekend flights to holiday destinations such as Mexico and Florida.
'It's going very well,' says Wiedemeyer. 'Our aircraft fly once a day, so we have a lot of excess time, especially at the weekends. I asked how we could increase asset utilisation and we believe there is a niche marketplace here, working with the tour operators and cruise lines, that works very well.' He admits the experiment also brings with it 'lessons to be learned' - mainly to do with handling people rather than packages - but says it is a worthwhile venture. 'I think it's a great experiment,' says Hibbets. 'It may have a negligible effect but it's a demonstration of how this company can think differently.'
Big and brown, yes. But boring is not how UPS sees itself right now.
Source: Airline Business
