March 2007 Newsletter

Is That Smooth Machine Called UPS Sputtering?

What’s going on in Atlanta? Is UPS, once considered the poster boy for the growth and solidity of American corporations, starting to sputter? One swallow doesn’t make a summer and a few bumps in the road (to mix a metaphor) may not derail a company so powerful and rich in history as UPS (it celebrates its 100th anniversary this year), but the company’s problems prove once again that nothing in American business is cast in stone.

From the recent revolving door for senior managers at UPS’ corporate headquarters in Atlanta to a number of poorly conceived stratagems, to an anticipated decline in profitability for ’07, there is a definite air of disarray at the one time smoothest running, most consistently profitable company in the transportation business.

Contrast the dithering at UPS over its order for the freighter version of the Airbus jumbo 380 with FedEx’ recent decision about the same aircraft. While UPS was wringing its hands whether to go ahead with the order to acquire the mammoth airplane or cancel it, Fred Smith didn’t waste any time. He realized the 380 was not the right airplane for FedEx, cancelled the order with Airbus and cut his losses. The “consensus” method of management at UPS is failing by procrastinating. This critical decision, if not taken soon, could result in future losses running into the millions.

The decision by UPS to downsize drastically its supply chain management division also is an indication that management has lost sight of its primary mission—moving packages throughout the U.S. and around the world.

The downsizing of this division was barely mentioned in the press, but the shrinkage in personnel (many hundreds lost their jobs) and closing of facilities was a major blow to UPS’ ambitious plan to be more than a delivery service but a complete supply chain management system for its customers. Of course, this decision throws a sharp light on all those supply chain organizations who have grown like weeds, and who boast they can save customers thousands and even millions of dollars in transportation costs.

If UPS can’t hack it with a supply chain operation having millions of dollars at its disposal and thousands of skilled, experienced people, how many of these smaller companies are doing nothing more than blowing smoke in the wind?

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A Loser Joins A Losing Company

Our industry well remembers that most venerable of forwarders, Panalpina, hit a very shaky period a couple of years ago.

The American operation started to bleed red ink in the millions under its U.S. CEO, David Beatson. David was probably the worst chief executive in the forwarding business since the industry started 60 years ago. Under his command, Panalpina moved its U.S. headquarters from its traditional home in Miami to the San Francisco bedroom community of Foster City because Beatson wanted to live in California. In the process, he uprooted hundreds of loyal Panalpina employees. His choice of personnel and acquisitions also proved disastrous. Almost simultaneously, accounting irregularities were discovered in Panalpina’s Swiss headquarters.

Panalpina hardly was the tidy, efficient operation for which Swiss companies are supposedly so famous. Presiding over this corporate chaos was Bruno Sidler, this “schoolboy in shorts” as I described him at the time. Sidler at least did the honorable thing by figuratively falling on his sword and resigning. I also predicted at the time that Sidler, phoenix-like, would rise from the ashes. And so he has, sort of, by becoming head of European operations for the troubled forwarder, EGL.

Perhaps EGL thinks Sidler has buddies inside the Panalpina organization who can join him? Methinks that’s wishful thinking. EGL does need help, however. Its European operation is in the pits.

Since Sidler was ousted, Panalpina quickly set itself to repair the damage and get back on track. Today, the forwarder is profitable once again. While Panalpina is clawing itself back, EGL seems to be hitting a low point (see next item). Bad move, Bruno. You’re a loser joining a losing company.

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EGL Left At The Altar

EGL CEO Jim Crane was counting his chickens before they hatched. He expected to receive $36 per share for his stock from a group of private investors to make him a real millionaire instead of a paper one. But alas, it was not to be. Those greedy Wall Street bankers thought they could acquire EGL; take the company private, load it with debt, declare millions in dividends for themselves and then sell it off. They had second thoughts when EGL announced its latest quarterly results. They were dismal. The bankers realized that even the investing public wouldn’t be suckered into buying the stock with such miserable results. They pulled out, leaving Jim holding the proverbial bag.

EGL is another sad case of one forwarder acquiring another, then living to rue the decision. In this case, Circle Air Freight was acquired by EGL. The acquisition gummed up the works for EGL and the forwarder has been suffering a severe case of indigestion since it took over Circle about four years ago. That match certainly was not made in forwarder’s heaven. Customers have consistently complained about lack of service with many of EGL’s competitors taking business away from the hapless forwarder. In order to keep sales up and satisfy Wall Street, EGL has been buying business with money losing, low margins.

The last quarter of 2006 showed the unhappy results and the Wall Street gun slingers headed for the hills. Unlike another publicly held competitor to which it often has been compared, Expeditors International, EGL never has been a favorite of Wall Street. Analysts favor Expeditors because the company delivers constant profits and remains focused on the primary job of a forwarder—moving freight on time, in good condition and with no hassles. Its president, Peter Rose, keeps his eye on the ball at all times. Jim, you could do worse than emulating Peter. Concentrate on running your business and forget the stock market. Now more than ever, EGL needs dynamic leadership to regain the respect of the forwarding community.

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Visions Of Monopoly Aren’t Confined To The Airlines

Although CII primarily is an air freight company, we handle ocean cargo from time to time. Also, my own career “down under” started in ocean transportation and the shipping industry always has fascinated me.

That is why I take such an interest in ocean shipping. Some of its more recent developments, however, have caused me real distress. Latest example; the potential purchase of one of the oldest names in shipping, Hapag Lloyd, to the industry’s largest player, Maersk. Shipping is following the same depressing path as the oil companies. I predicted some years ago that the huge oil companies would merge into huger companies. They have not disappointed me. Result: oligopolies and higher prices at the pump! My predictions were right on the money.

Now, the shipping business is in my crosshairs. Less competition and higher profits for the surviving companies.

Maersk now controls up to one third of the entire volume of ocean shipping. With the acquisition of Hapag Lloyd, this figure will rise to 40 per cent. With such a huge percentage of the shipping business, Maersk, as the surviving company, will be in a position to raise prices by manipulating (just as the oil companies do with refining) the number of vessels that will ply each sea lane.

In the good old days of Conference Line cartels, shippers did pay a little more but they got value for their money. They were guaranteed year-round service to take their products to market. Conference Line vessels even scheduled their service to unprofitable ports of call to maintain good relationships with their customers. What do we have today? Capitalism at its worst. High rates and poor service. Competition has all but ceased on the great majority of shipping lanes. Too bad we can’t build bridges across the oceans. At least truckers still believe in competition.

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Julian Keeling