Help? The Post Offices are Delivering More Than Mail!

To some, the idea that some of the worlds' major Post Offices are becoming entrepreneurial worldwide logistics organisations is not only very strange but, almost impossible to contemplate. But, this is certainly the mission of several Post Offices and will create many opportunities for the air transport industry.

Today, I would like to provide the background, (particularly focusing on express and bulk international mail), recent history and the direction these previously government run institutions are likely to pursue. Some of these Post Offices have been or are about to be privatised and others are becoming separate government corporations. Many have major acquisition plans that are defensive in their home markets and offensive in major world markets.

Obviously, the history of postal services goes back hundreds of years. However, in the late 19th century, it was the linking of the post through the Universal Postal Union (UPU) that laid the foundation for the monopoly of international mail by national post offices. This monopoly was largely unchallenged until the 1960s when KLM offered American publishers a new airfreight service. KLM would fly periodicals to Amsterdam where they would be split and fed into Dutch Post's international mailstreams. This process substantially undercut the price of the direct service of the United States Postal Service and heralded the birth of the remail industry. Remail has grown to such a level that Triangle studies show that some 20 to 25 percent of all international mail goes via the remail route rather than via the national post office's airmail or surface mail system.

As remail was growing, Federal Express (USA) and DHL Worldwide were establishing a time definite more reliable document service. This new service was a direct challenge to the postal monopolies. Their advantage was the ability to offer end-to-end services keeping the express item inside a single system instead of having to rely on overseas partners or counterparts.

Post Offices were forced to react to this new threat and retaliated with legal action, which failed. Post Offices attempted to maintain their dominance by lowering prices believing that integrators were 'cream skimmers' and that lower prices would make the integrators' services less profitable.

But it was too late. The Post Offices failed to understand that a new, more comprehensive service was being offered. This new service was as an integrated, quality product, under one organisation, something the post offices collectively failed to achieve under the UPU.

Representing some 80 percent of the international mail and express markets, the next stage was for 20 of the worlds' leading Post Offices to get together and form a separate express company. This new company, based in Brussels, and called Unipost was to develop networks and services to rival DHL and Federal Express -- who had, by this time, 'gone international'. Relative newcomers, TNT of Australia and UPS who appeared on the world stage out of an almost monopoly parcels market within the USA, were also offering time definite integrated services.

Unfortunately for Unipost, Sweden, France, Germany, Canada, and the maverick Dutch Post Office formed a new consortium, GDNet. This new consortium went on to purchase 50 percent of the TNT Express division, which had overstretched itself and was running out of time.

Consequently, the Unipost network collapsed overnight. It would later take the form of the International Post Corporation (IPC), funded by those major Post Offices that have yet to develop the freedom to compete. In its current form, the IPC provides an excellent technology and market research centre.

Due to differing philosophies, the GDNet consortium proved very difficult to hold together. Germany departed and purchased 25 percent of DHL International, whilst the French and Canadians purchased their dominant domestic express carriers. Meanwhile, Sweden, which had developed world leadership in marketing electronic postal services, was coping with having to be one of the first post offices to surrender its domestic letter service monopoly. The ever-clever Dutch, by now an 'independent' government--owned company, purchased TNT for a comparatively low price when one considers the cost of setting up a similar global network.

Germany (Deutsche Post), by this time, had attracted a team of former management consultants who set about buying up a European network of mainly parcels carriers. Often paying premium prices, the network is largely complete but it is yet to be fully integrated. Additionally, they have been developing their logistics capabilities as evidenced by their acquisitions of Danzas and AEI. We can expect the German Post Office to be privatised this year and their domestic mail market liberalised by 2003.

Observers believe that within ten years there will be only four or five mail as well as parcel networks in Europe. And, the battle is still raging. The British and French have rightly identified Germany, with at least 27 percent of the European market, as the place to start. The British are off to a better start with their purchase of German Parcel, believed to be worth about US$700 million. The French are trying to purchase a majority of the other major German private parcels operator, DPD. The German parcels market, unlike most other European markets, is consolidated and mature. UPS, who launched its first European operation in Germany during the mid 80's, decided to build its own European network and had by the mid 90s purchased parcels companies in all EU countries. General Parcel, the network of which German Parcel is a member, maintains well-organised agency relationships throughout Europe. But there is no doubt that these agencies will have to be bought or changed as ultimate ownership and control will be essential to the function of the whole network and to establish a common corporate ethos and branding.

Meanwhile, the integrators have moved rapidly into parcels, freight and now logistics in an attempt to fill their under utilised, high cost document delivery networks and this move has stirred the sleeping Post Office giants. Additionally, this move has been reinforced by the increasing substitution of documents by email and this means that the integrators and Post Offices must concentrate more on moving things.

It remains to be seen whether the integrator is the best business model to continue to provide high quality service levels whilst prices are under downward pressure. Integrators will have to maintain highly expensive, under--utilised transport infrastructures that may eventually prove uneconomical. Meanwhile, Post Offices are down to around only 11 percent of the express global market and even less in the US domestic market and will have to fight back with better services and more competitive pricing. Everyone is looking at e-commerce and the expanding home delivery market as a solution to their problems.

In the largest countries, international mail is a relatively minor area for the post offices, but many see the rapid growth of remail and express as the thin edge of the wedge to their domestic monopolies. Domestic deregulation, already successfully introduced in Sweden, New Zealand and Argentina, is spreading rapidly through Europe. The rapid development of electronic services is going to dramatically reduce regular high yielding business mail over the next few years.

The cost of maintaining universal service, i.e., every house, every street, every working day, is used by post offices to justify their monopoly positions. However, to maintain delivery to the remote Scottish islands or indeed, the Kampungs of Terengganu, probably cost around 5 percent of postal sales.

Given the chance, most private companies would accept a 5 percent sales loss to compete with the notoriously over manned and restrictive practices of most national post offices. These private companies lack the political baggage of the post offices and are probably better able to develop innovative delivery mechanisms that would provide high quality services at realistic prices.

The future of postal services lies in the hands of the regulators who could force post offices to increase their customer orientation and provide better services at lower prices. These regulators are responsible for maintaining the universal service standard whilst awarding licences to private and public operators.

Deutsche Post has invested considerably in many acquisitions aiming to build a one-stop conglomerate for the global logistics customer whilst preparing itself for its stock market flotation. It remains to be seen whether Deutsche Post will be able to establish its culture across all its acquisitions. Certainly the recent agreement to spend US$75 million on promoting the Deutsche Post name via Formula One motor racing is an indication that the centre is not just a holding company for all its investments. Cross-fertilisation will begin at the racetrack!

TPG (Dutch Post) is enjoying success. But the majority of its profits come from the postal side whilst showing renewed strength in express (except in the USA) and automotive logistics. The Dutch Government is now a minority shareholder in TPG and one can expect some interesting developments in the not too distant future. The European Commission is currently investigating whether TPG unfairly used profits from its postal operations to finance expansion of TNT Express - an academic exercise!

Shown at the top of Figure 2 are those posts that have decided they must innovate in order to compete. Once again Deutsche Post is strongly represented, having developed e-commerce offerings and web-based mail services amongst others.

The Scandinavians, also strong innovators, are well managed and in the forefront of developments such as hybrid mail. They have adopted strategies that concentrate on improving their domestic competitiveness rather than operating on a direct basis overseas. Eventually, some may be bought by other major international players or even by telecommunication groups.

The bottom left corner of Figure 2 illustrates those traditional, national organisations. The United States Postal Service (USPS) represents the majority, some 40 percent, of global mail with Japan showing significantly and one day these players will be granted the authority to make international acquisitions, which will certainly make life even more interesting. The ability of the USPS to adopt real commercial strategies domestically is restricted by the US regulatory environment and concerted resistance by several important lobbying groups to any change. The USPS, with a significant war chest, may be forced to expand overseas as its only option.

I am sorry this figure is so complicated but a look at the bottom line illustrates the international mail value chain processes. The operators shown illustrate, in varying degrees, where they are in the international mail value chain. As you can see, no one player really has a presence along the length of the value chain, although the posts have started to show movement up and down the chain. In the future it could be possible that one post office or more likely a group will collect international mail in their own countries and co-ordinate delivery via a private operator or themselves in a foreign country -- a true end-to-end service.

Are the post offices going to become competitors or partners? Are there opportunities or threats? Let us first try to understand in which business sectors post offices operate and what are the broad interest and competence areas.

Figure 4 may be familiar to some of you. It shows the industry segmentation by speed and weight / size of consignment. Until now the post offices have occupied the lower left hand corner -- light, small items that are not particularly time critical. The freight forwarders, integrators and logistics specialists provide the heavier and faster requirements (Segmentation 2). Figure 4a shows the aspirations of the fastest moving post offices. With the exception of airlines, shipping, and bulk transport, Deutsche Post is far ahead of the game with interests along the whole logistics chain -- at least for now!

As far as Europe is concerned, the four main trans national post offices, the Dutch, French, British and Germans, are fighting over the multi--billion dollar cross border, pan--European parcel market. They see a one-stop-shop, pan-European network and recognize the need to blend these cross border delivery economies with domestic consolidation. Although the market is rapidly commoditising, they believe that size matters and economies of scale will prevail. Consequently, they have been trying, sometimes at inflated prices and particularly in Germany, to purchase networks that give them, at least, a comprehensive European network. This is a more or less completed exercise. And, there are plenty of national parcel operators still available in Europe concerned about the trend towards lower prices. They feel the need to offer a national as well as European service that may eventually expand into an intercontinental connection.

Leading the global logistics charge is Deutsche Post. Let us look at Figure 5. This circle of players gives the impression that size matters. If you are big enough, you can purchase several different global logistics facets and more importantly tailor your products to customer needs. Then maybe you can achieve the high ground, especially if you expect to play in the biggest market of all, the USA. Not surprisingly, this is the Achilles heel for those fast-lane post offices that have comparatively weak operations in the USA. Deutsche Post's purchase of AEI and Yellowstone was a clear step along the path to building a better US network. And one can see that other services, like local delivery will surely be built onto this network (with DHL?) over time. How much ownership foreign carriers may have in the US airlines is a major inhibiting factor and in effect, this means there are two separate DHL organisations. But a company like Airborne would become a very attractive target should the foreign ownership rules be relaxed.

Let's revert to the post offices' core business -- mail. First, let's look again at the mail supply chain and in particular, the added value opportunities available to post offices as they try to escape from their existing price -- eroded, commoditised markets.

Post offices want to develop along this value chain. Some will develop through acquisitions and some through alliances. This means that airlines and airfreight forwarders with established world networks could be ideal partners. These partnerships could offer joint branding service features and provide the glue necessary for these segments to come together. After all, not every post office is going to buy an AEI or Danzas!

There is no doubt that the relationship between the airlines and the post offices is not at all satisfactory. Over recent years, the post offices have ground down the airlines' yield on airmail traffic prices whilst requiring higher service levels. This has been done in order to compete with the private mail companies and integrators. The airlines themselves are providing less capacity for the mail product and are extremely frustrated when weights differ from the contract and when loads do not arrive as booked. Nevertheless, the tradition that the mail must go FIRST not only affects major airfreight customers but also means that the traditional post office -- airline relationship is under severe strain. This is especially true for those airfreight users who now have their own just-in-time logistics supply chains.

This is clearly an opportunity for airfreight forwarders who seem to manage the airlines better and have a wider base of accounts. Therefore, there is less last minute traffic fluctuation. In some instances, rate levels from mail may even be below what the forwarders are paying the highly intensive quality and IT control that the forwarder has on la door-to-door basis is something which the post office is still unable to enjoy on a comprehensive basis.

The one real snag is the preferential customs clearance arrangement that the post offices have with the airlines. And yet, as forwarders become more like airlines surely this one sticking point has to be resolved as commercial and service pressures increase. It is perhaps for this reason that Deutsche Post has brought into airfreight forwarding. The probability that another post office will purchase a freight forwarder is very high, particularly when you consider the volume and purchasing power provided by the national post office in its home market. Some post offices are also major routers of mail (i.e. remail) into their country and this provides inbound airfreight traffic, which an airfreight forwarder could develop. Again, this is about combining mail with freight in consolidation and whilst there appear to be arguments against doing this at the moment, one can see that these hurdles will be overcome in the not too distant future.

One of the airmail products that do not meet high standard requirements is transit mail. In Europe with its concentrated population, the growth of e-commerce parcels seems to be driving the case for post offices to route their mail into one location for single-entry clearance. Then the Post Office uses onward trucking to decentralised postal centres or private distribution points. The opportunity exists at both ends for a global or European freight forwarder (with trucking?) to develop a joint venture with the post offices.

Increasingly, large shipments are sent in bulk outside the originating postal network for local distribution (a process called direct entry). I believe post offices will either purchase their own local freight forwarders or form joint ventures so they can be more competitive in this market sector. The story is not always a question of the rate from the outbound country, but also what are the qualities of, and final charges for, final distribution will be.

As we all know, over the years the airlines have slowly lost control of their market. Their product is commoditised and the freight forwarder is now getting so powerful that it is organising its own airline flights without the shipper having any real influence on which carrier is used. This is perhaps satisfactory for the by-product carriers where their net margins are still more than adequate, but to the all-cargo carriers it is almost impossible to succeed by adding value and product differentiation. So are there opportunities for the post offices to work with the airlines and get back to the shipper? If so, what sort of shipper? Perhaps the new e-commerce players.

As you must have realised by now, the original hundred per cent cosy UPU arrangements, where every post office worked with each other, is not the business model for the future. Complicated alliances are being developed but, at the same time, acquisitions are being made here, there and everywhere which can break up an alliance even before it has started. Maybe a national post office needs an alliance with another network. This is currently new thinking, but maybe it could be positively and constructively developed. Imagine the value of the airline alliances and post office brands put together with air miles. Is there an opportunity here to develop further on the global e-commerce revolution? Can the airline act more like a freight forwarder by making delivery and clearance arrangements in overseas territories if it is not competitive or ideal to work with former national post office partners?

Are there opportunities for air miles and international post? Traditional, international letter mail is going to reduce substantially. The growth of e-commerce will prompt a major explosion in international parcels that will require considerably more air capacity at probably even lower rates. Is there an opportunity for one or two airlines to form a joint venture with a group of post offices? Is there an opportunity to set up a private postal network; in other words, a new integrated operation? Not all parcels will be express or urgent -- the much bigger e-commerce market will require reliable day definite services suitable for such an operation.

The joint ventures here in Malaysia, Australia, Brazil and, until recently, France between the national airlines and their own local post offices exist at the moment only domestically -- surely the bigger opportunity is inter-continental? Usually there are weekend backlog disputes over priority for capacity. Could airlines pull these together and build a whole new player, an all-postal carrier? I think so, if the traffic rights anomalies and restricted practices are overcome. The post offices' international parcels business is going to explode with e-commerce in the next few years. There is real opportunity here.

I know there must be some of you in the audience from airports. Airports themselves are also looking to add value. Are there opportunities for working with the post offices in building logistics and e-fulfilment centres on airport property and providing a secure, instant dispatch environment on an airport-to-door basis?

Is there a need for the post offices to be more active in the handling of transit mail at airports? Successful development of the joint venture in Frankfurt between the airport, Lufthansa and Deutsche Post has seen growth and an improvement in service after initial teething troubles. Is there a model here for other major airports?

So, in summary, the session title 'help, the post offices are delivering more than mail' is certainly very true and I hope you will agree from this presentation that there are actually more opportunities than threats. The post offices' core competence is process management. They are bureaucrats with little entrepreneurial flair and global awareness, but several of the fast and medium fast organisations are open to new ideas. I hope that what I have given you today is an outline of some of the opportunities. Don't worry about the threats - take the opportunities!