Thursday, December 27, 2007

The future of the Post in Delivering Movies

Both the Financial Times and the Wall Street Journal are reporting that Fox and Apple have reached an agreement to set up a movie rental service. In this service,users would download a movie from the iTunes store at a cost of $2.99 for one month's rental. This is cheaper than anything offered by Netflix or Blockbuster by mail and every video rental store. This service also offers the convenience of immediate delivery, even if the immediate delivery may take as much as two hours, and restrict the use of a home computer or home computer network during that period. (See Fortune article if others are innacessable.)

Movie rental services are not new, as four other services, including Amazon, have offered rental services since 2006. However, Apple is the dominant supplier of audio and video mp3 players, and has 70% of the worldwide and 80% of United States market share of purchased downloads of music. Apple's entry into the rental market opens download rentals to the largest established market of people already accustomed to downloading media. Also in 2009, when television broadcast goes high definition and the large installed base of standard definition televisions become obsolete, consumers will have substantial incentives to replace their television with a high definition television which will have inputs that allow easy connection to an iPod or computer.

Now what does this mean for the Postal Service? Netflix has been one of largest volume success stories introducing new volumes. While the new Fox - Apple agreement will not immediately affect volumes, the Postal Service could be a significant loser in this new technology. (For other winners and losers, see Silicon Alley Insider.)

In order to extend the life of the existing physical delivery model, both Netflix and the Postal Service will need to find ways to cut the costs of handling the Netflix product to keep Netflix competitive. It would appear that they have a year to find a way to do this. It is time to get started now.

Saturday, December 15, 2007

Investing in the Courier, Express, and Postal Market

Publicly traded firms in this market space now includes 10 firms that American investors can easily track. These firms can be grouped as follows:

Express and Parcel Carriers
  • United Parcel Service
  • FedEx
Integrated Mail, Express, and Parcel Carriers
  • Deutsche Post
  • TNT
  • Oesterrich Post
Local, Same-day, and Dedicated Couriers
  • Dynamex
  • Velocity Express
  • ABX Air
  • Air T
All of these companies can be tracked on Yahoo Finance easily. Yahoo provides stock price information including information for the publicly traded European posts. Unfortunately, Yahoo Finance does not provide news for the firms not traded on US exchanges. For news on at least Deutsche Post you can go to the UK version.

Monday, November 26, 2007

Quebecor World Suspends Dividend Payment

Quebecor World Inc., North America's second largest printer announced today that it is suspending dividends on two series of preferred shares. In its press release, Quebecor World stated that while it "has the funds available to pay such dividends, it has been advised by counsel that as a result of recent developments, the Company may be prevented from paying dividends to holders of its preferred shares because it may not satisfy the applicable capital adequacy test contained in the Canada Business Corporations Act («CBCA»)."

Quebecor World's actions has led to speculation as to the value of the company's shares and the possibility that it may be purchased and taken private. Analysts have suggested valuations that range from zero to $6 per share. The current share price is is $2.44 Canadian.

Queborcor World is a significant producer of mail in both the United States and Canada printing advertising inserts and circulars, catalogs, direct mail products, magazines, books, and directories. In addition it provides services important to the production of mail including digital premedia, logistics, and mail list technologies. None of the financing and or ownership issues at Quebecor World should affect the service that the company provides its customers.

Saturday, November 24, 2007

Managing a National Network in a Slowing Economy

Economists are increasingly acknowledging that the economy has slowed considerably. The number that now forecast a recession in the near term has doubled. (See: "More Economists See U.S. Recession Ahead, NABE Says" By Courtney Schlisserman published on Bloomberg November 19, 2007) For parcel and postal carriers in the United States this may mean an extended period of weak volumes. Already UPS and FedEx have indicated that this year's peak season will be only marginally stronger than last and the Postal Service noted that October revenue was $300 million below plan. What are the challenges to managing in this environment?

  • The economic slowdown is not uniform. Not all customers, industries or geographic regions are slowing at the same rate or same time. This requires more careful attention to developing customer, industry and geographic forecasts to better plan manpower and transportation requirements. National forecasts, while useful for general trends can't help manage the costs in Phoenix or Detroit. Poor local forecasts can result in over-staffing and lower margins.
  • The network does not change. Unfortunately for all carriers, while volumes stagnate nationally and shrink in some regional markets, the geography of the United States remains constant. Also while business customers may ship or receive less, they still demand service often on the same schedule as before. The challenge that carriers face is adjusting their transportation schedules between sortation centers, scheduling labor in sortation schedules and rescheduling pick-up and delivery routes to reflect lower volumes per stop.
  • In shrinking markets, even labor can be a fixed expense. While all inputs can be adjusted in the long-run, carriers face the challenge of adjusting capital investment and contracting decisions that were made assuming stronger economic growth. To the extent that labor contracts restrict layoffs or re-assignments, labor becomes a fixed expense until those contracts can be changed or employees can be encouraged to retire. The Teamsters have indicated that UPS has agreed to pay the Central States Pension Fund an additional $1.5 billion to fund to allow UPS employees that participate in this plan to retire early after 30 years of employment. This could result in the retirement of as many as 3,000 of the 42,000 UPS full time employees that work in the Midwest, Great Plains and Southern States from Texas eastward and participate in this pension plan. This decision by UPS allows it to shed excess labor that would earn $28 per hour (plus benefits) under the new contract and amortize their extra retirement costs. To the extent that these employees need to be replaced now or when the economy picks up again, this decision allows UPS to reduce its operating costs as the new employees will earn $16.10 an hour.
  • Contracted services require right-sizing to reflect operating realities. All carriers use contractors to provide transportation services between sortation facilities and transport mail, express, and parcels by air as well as the provision of non-core services. Carriers use both long and short-term contracts for these services. To the extent contracts for transportation and other services include payment, equipment or capacity guarantees these guarantees act as a fixed cost until the contracts expire or guarantees can be modified. Contract termination payment provisions may prevent carriers from adjusting contracted services as quickly as economic conditions require keeping excess capacity operating longer that is operationally justified.
  • Slowing volumes require re-examining capital expenditures. When even common equipment such as a delivery vehicle can have a life span of twenty years, it is likely that carriers have built up excess capacity in facilities, sortation equipment, and transportation equipment. While some of the capital resources can be transferred to geographic markets that need them, others will have to sit until volumes pick up again. As such, carriers will likely delay purchases of vehicles or equipment and investments in new facilities unless the investment can have an impact in improving service, reducing costs, eliminating redundancy or replacing outmoded operating processes.
  • Communication is critical. All carriers in this industry have developed strong long-term relationships with communities, employees, contractors, and customers. As slower economic activity often results in changing operations and changing networks, communication with all parties is critical to ensure that service continues to meet service standards and that employees, contractors, stakeholders and shareholders understand in a timely manner how changing economic conditions affect the firm. Communication is most critical for the Postal Service as its actions are still subject to substantial regulatory and legislative review that can slow its ability to react to changing economic conditions.

Thursday, November 22, 2007

Pensions and Structured Debt

The funding of pensions is an important issue for both United Parcel Service and DHL in the United States Market. Both carriers participate in Teamster multiemployer plans. While UPS will be withdrawing from Central States plan before the end of the year, it still a contributor to twenty other multiemployer plans and offers a single employer pension plan to its part-time employees and some non-union employees.

Pension plans have been some of the largest investors in the alphabet soup of structured debt investments and are now facing the potential of one trillion dollars in losses. These investments were offered by the largest investment banks and the investment quality was often rated highly by debt rating agencies such as Moody's and Standard and Poors. Most importantly, many of the multiemployer plans, to which UPS and DHL contribute, may be forced to sell their structured debt at a substantial loss. If required, this will occur soon after the investment grades of the debt are reset to reflect the current perception of risk which many believe will be below investment guidelines set by federal regulation and/or plan trustees.

Now that the true risk associated with these investments are becoming known, questions are being raised about whether any of the parties that were involved in decisions to invest in structured debt failed in their responsibilities and should be held financially accountable for losses that pension funds have incurred. These parties include the plan trustees, investment managers, and the rating agencies that determined that the structured debt met the investment quality standards of the pension plan's investment charter. The board of Trustees of the Teamsters Local 282 pension fund has filed a class action lawsuit against Moody's for giving excessively high ratings to bonds backed by subprime mortgages. While this suit focuses on the impact that Moody's action had on the valuation of Moody's stock, other suits against Countrywide Financial, Citigroup's 401(k) plan, State Street Corp. , Bear Stearns, and AIG illustrate that the issuers of debt and the trustees of pension and 401(k) plans face the risk of legal action. Contributors to multiemployer plans including UPS and DHL need to monitor these law suits in order to monitor their future financial risks.