Every business sector has a tipping point. For the cluster of companies providing regional parcel shipping services in the United States, the tipping point may very well have been Jan. 30, 2009.

On that date, DHL Express, one of the "Big Three" parcel companies, ceased domestic operations, effectively ceding the $55 billion a year market to FedEx Corp. and UPS Inc. With DHL gone, parcel shippers feared it would just be a matter of time before the two behemoths leveraged their duopoly status to raise rates, jack up fees for add-on services, and generally behave in ways that resembled a 1,600-pound pachyderm rather than two 800-pound gorillas.

In the Boston suburb of Woburn, Mass., James A. Berluti, president and CEO of Eastern Connection, a regional parcel firm whose network extends from Maine to Virginia, also saw the writing on the wall. He realized that, at some point, the marketplace would demand a third-party player to check the actions of the big boys, especially since DHL had been the low-price provider. Barring the entry of another large national carrier, a scenario deemed highly unlikely, established regional players like Eastern Connection would need to step up and fill the void, he reasoned.

Nearly three years later, much of what parcel shippers envisioned has come true. FedEx and UPS have raised their base rates in almost identical fashion; increased the number of "accessorials"—add-on charges for services beyond basic transportation—and hiked prices on those as well; changed the formula for measuring the dimensions of light-density packages in a way that has led to double-digit rate increases on non-compliant shippers, and begun phasing out relationships with third-party consultants retained by shippers to help them save money on parcel services.

The search for alternatives

In the meantime, Berluti's vision has also come to fruition: As shippers have begun to weary of the duopoly's practices and to seek alternate remedies, the regional carriers' value proposition has never seemed more relevant.

DHL's exit "would become the most important event in the history of the regionals," said Berluti, who co-founded his firm in 1983.

As it happens, FedEx and UPS have become the regionals' best marketing tools. "The strategy of the big two has opened the door for regional carriers to get a more welcome reception from shippers than they have in the past," said Douglas O. Kahl, a consultant with TranzAct Technologies Inc., an Elmhurst, Ill.-based transportation consultancy.

Added Craig Heurung, who heads sales for Spee-Dee Delivery Service Inc., a St. Cloud, Minn.-based regional carrier that serves eight states in the Midwest, "some our best leads are driven to us by FedEx and UPS."

Heurung said most of Spee-Dee's business comes from FedEx and UPS customers disenchanted with the rapid proliferation of accessorial charges that can significantly drive up the total shipping tab. "People are simply sick and tired of the add-on fees that they continue to pile on," said Heurung, noting that the increases in accessorial fees are in many cases outpacing the hikes in transportation charges.

The regional difference

The regionals don't pretend to be all things to all shippers. They don't have the resources to map out a national footprint supported by the high-tech tools demanded by many large shippers to manage their shipment visibility. The U.S. Southeast—and particularly Florida—currently lacks any significant regional carrier presence.

While there are no firm figures because the regionals are privately held, it is estimated the sector's total revenue is about $500 million a year, a fraction of FedEx's and UPS's total annual revenue of about $90 billion. On average, UPS moves as many packages and envelopes in two days as the largest regional carrier will handle in a year.

In addition, regional carriers can't gain much traction among larger shippers because they already enjoy significant volume-based discounts from either FedEx or UPS. As a result, the regionals focus on small to mid-sized shippers who often lack the leverage to get price breaks from the two giants.

However, the composition of the regionals' networks allows them to do what FedEx and UPS generally can't or won't do: provide next-day ground deliveries at distances up to 400Ã¢ï¿½ï¿½450 miles, and do it without an abundance of accessorial charges. FedEx and UPS, by contrast, require their shippers to upgrade to costlier air services if they want a shipment delivered the next business day at those distances.

For example, Phoenix-based OnTrac, which serves eight Western states, charges a tariff rate of $5.99 for delivering a package the next business day from Los Angeles and San Francisco, a distance of about 400 miles. FedEx and UPS would charge about $36.00 for the same shipment delivered via air by 10: 30 a.m. the next business day, and a bit over $30.00 for next-afternoon delivery.

The rate gap exists on shorter hauls as well. Spee-Dee charges a tariff rate of $3.67 for a one-pound package shipped from Minneapolis to Eau Claire, Wis., and delivered the next day, while UPS charges $5.12 for the same shipment.

Spee-dee and OnTrac have eight and 10 accessorial charges, respectively. FedEx and UPS, on the other hand, have an estimated 42 accessorials, and that's a conservative figure, according to The Colography Group Inc., a research and consulting firm based in Marietta, Ga.

Because of their focused service areas, the regionals can provide late pickups—sometimes up to 9 p.m.—and still deliver the goods the next day. Rick Jones, CEO of Austin, Texas-based Lone Star Overnight (LSO), which serves four states including every address in Texas, said the later pickups are a boon to his company's customers because it enables them to push more goods out the door per day.

The regional model also becomes more viable as the nation's supply chain itself becomes more regional in scope. Mark Magill, OnTrac's director of business development, said one of his largest customers, a retailer with a distribution facility on the East Coast, uses OnTrac's network as a mobile DC out West, enabling the retailer to tap into the carrier's service area of 60 million people without building a brick-and-mortar facility.

OnTrac's geography is so vast for a regional carrier that a customer can ship a package overnight from Bellingham, Wash., to Yuma, Ariz., achieving NAFTA-like next-day coverage for its deliveries, Magill said.

The top regionals agree they while they cannot replace FedEx and UPS, they can peel off business from the two that might be best suited to moving in regional networks. But their tactics differ. Spee-Dee touts its initial rate as its best offering and does not discount from there. Its rates are the same whether a parcel is delivered to a business or residence, according to Heurung.

Eastern Connection's tariff rates will match those of FedEx and UPS, but from there, the regional will discount its prices to undercut the big two. Lone Star, whose customer mix is somewhat different in that it is heavily skewed toward the business-to-business segment, will offer rates that, in some cases, are higher than FedEx's and UPS's. The company does offer an express product, "LSO Simple," which matches FedEx's and UPS's base rates but comes with the promise of no fuel surcharges or accessorials.

Jones of LSO said he shies away from serving the retail industry and instead focuses on sectors like legal and health care, which have better margins. He steers his company to clients and sectors with supply chain needs that go beyond the basic transportation solution. And unlike other regionals that have de-emphasized the more time-sensitive express service in favor of the much larger ground parcel business, Lone Star pushes its express products and lets the ground parcel category "come along for the ride," according to Jones.

The Lone Star CEO said he wants to avoid situations where his firm's value play is based on price alone. "I don't want to get into a commodity price war with multibillion dollar giants who can crush me," he said.

A national network?

For years, there has been talk among the major regionals of knitting together a unified national network to compete with FedEx and UPS. Until now, the extent of their cooperation has been to share information that would, for example, allow Eastern Connection to refer a customer to OnTrac if the shipper needed a regional presence out West.

Berluti of Eastern Connection said that although there is no specific timetable, the development of a national network is "absolutely going to happen." He said the "marketplace needs a third player because the duopoly is not working for the customer. The regionals are interested, and the shipping community is as well."

There is no shortage of obstacles, however. They range from building a uniform IT system, to establishing a presence in the Southeast, to working out revenue-sharing issues, to harmonizing disparate product lines among the various players.

The regionals have "different billing systems, different accounting and tracking systems, and different tracking algorithms," said Jerry Hempstead, who runs the Orlando, Fla.-based Hempstead Consulting and was a top U.S. sales executive with DHL and the former Airborne Express, which DHL bought in 2003.

Hempstead said DHL tried to convert Airborne's customers to DHL's tracking, billing, and shipment rating systems, only to encounter enormous problems in the execution. The failed conversion "killed the Airborne acquisition," Hempstead said. "The wheels just fell off."

Berluti said regional carrier executives are mindful of the challenges and are working diligently to remove them. He noted that Eastern Connection has an interline relationship with U.S. Cargo, a regional carrier that serves Ohio, Pennsylvania, Virginia, and West Virginia, where Eastern Connection tenders packages to U.S. Cargo network for two- to three-day deliveries into a region mostly beyond Eastern Connection's geography. In return, Eastern Connection handles packages originating in the Ohio region for delivery throughout New England, the Northeast, and the Middle Atlantic.

"We are already a super-regional carrier through this relationship," Berluti said.