Back in the 1960s, three guys with the initials "D," "H," and "L" started shipping documents from the West Coast to Hawaii to enable pre-customs clearance before carrier arrival. They took advantage of an unlimited excess baggage allowance that Pan American World Airways enjoyed as an international carrier on U.S. domestic routes.

In the early 1970s, Fred Smith took advantage of a gap in air traffic rights regulations and set up a national express hub-and-spoke network. The service was designed to handle checks for the Federal Reserve, hence the name, Federal Express. During the 1980s, a national carrier that originated in Seattle called United Parcel Service joined FedEx and DHL in the market. Meanwhile, a pair of Aussies-Peter Ables and Gordon Barton-were developing overnight time-definite express services, eventually to become known as TNT, first in Australia and then intra-Europe.

DHL expanded globally and eventually FedEx and UPS followed suit. A whole new market was created-or taken away from-the post offices. It takes a long time for bureaucratic organizations like post offices to react. Now they're beginning to.

Some React, Some Don't

Deutsche Post-with its dynamic management-capitalized on its highly rated German postal monopoly and went on an acquisition rampage, buying a majority stake in DHL and the major freight forwarders Danzas and AEI, among others. The postal monopoly revenue is only 35 percent of total sales, yet it currently manages to represent 74 percent of the profits.

The Netherlands Post Office bought the Australians (TNT). FedEx is now setting up joint arrangements with the U.S. Postal Service and other post offices around the world. In fact, FedEx has been carrying a large percentage of U.S. mail in a daytime airlift network since Aug. 1, and FedEx drop boxes have started to appear in post offices throughout the U.S. FedEx also has a close relationship with the French Post Office via its European hub in Paris.

UPS, which has recently acquired some mail chain companies in the U.S., has 85 percent market dominance of the domestic road market with high margins that allow it to compete and develop its international services in competition with the other post offices, particularly in Europe.

Meanwhile, the USPS is faced with FedEx and UPS tanks on its lawns, challenging and firing salvos every time it puts its head above the parapets in an attempt to become more competitive.

No Simple Answers

What does all this mean for the U.S. shipper? Are the overseas post offices likely to enter the U.S. market? Should the USPS be allowed more commercial freedoms? The answer is probably "yes," but not in a way that most would expect.

Within 30 years, most of the European post offices will have lost their monopolies, become privatized and, probably, consolidated into three or four groups. Will these groups or any one organization be strong enough to enter the U.S. market?

The U.S. is on its way to de facto deregulation of the USPS, developing concepts like zone skipping and really only being involved in "last mile" delivery. This affords opportunities for new U.S. domestic players like the logistics arm of printers R.R. Donnelly/CTC to develop competitive networks that could be linked to overseas post offices. In addition, FedEx and UPS could work more with the USPS to achieve economic distribution and handling of mail and parcels, particularly to the home. Airborne Express is, in fact, already ahead of the game with its recently launched "Airborne at Home" product.

DHL will have to enter the U.S. domestic market despite current protestations and achieve economies of scale in collection and delivery for the same reason UPS operates an intra-European service. It also has to offer a complete range of national, regional and intercontinental express services. The rules and regulations in the U.S. means DHL/Deutsche Post can't acquire the obvious company for absolute synergy, which is Airborne or, for that matter, any other airline operation.

Foreign owners can't control more than 25 percent of an airline in the U.S. In Europe, foreign owners can control 49 percent. The rules aren't the same and it's anybody's guess why the U.S. customer shouldn't be allowed a greater range of choice. In this field, the U.S. carriers FedEx and UPS excel, having created their market around the rules and controlling the development of the USPS. It's not surprising that selfish interests prevail.

For the first time in its corporate life UPS has come up against another 800-pound gorilla, one that also has a major cash source to generate competition internationally or to stifle it domestically-Deutsche Post. As UPS takes Germans to court in Germany, stand by for more court action in the U.S.

UPS argues with a considerable amount of credibility that the majority shareholder of Deutsche Post is, in fact, the German government, which is the regulator that controls the German domestic monopoly. German domestic mail rates are among the highest in Europe and, to be fair, Deutsche Post has reduced its staff by 140,000 over the past five or six years, achieved impressive efficiency by capital investment and is certainly on its way to becoming a fully privatized company against UPS, which has a token 10 percent in the stock market and is still management-owned and controlled.

Competition is Good

Do you care about all this if you're a U.S. shipper? Do you care whether the 800-pound gorilla that's cross-subsidizing and offering you lower prices is brown or yellow? The answer is probably "yes" and "no." U.S. shippers want lower rates. Those can only come from more competition. This is either going to come from overseas post offices or U.S. regulatory authorities who will create a much more entrepreneurial environment to allow more competition. Should the USPS, for example, have the monopoly on home delivery? Does anybody else want it? Is it fair to restrict the development of a highly successful global airfreight forwarder, AEI (now Danzas) now that it's foreign-owned?

Judging by other overseas post offices around the world, a key success factor seems to be non-postal management being brought in at the top. Perhaps the U.S. government should seek the head of IBM, Ford or General Motors to run the USPS and allow the freedom to operate the service as a business. The USPS is faced with declining revenue from first class mail, increased contractual labor costs, political concern about closing post offices and reducing staff, and the requirement to serve 1.7 million new addresses each year-it's not easy.

Certainly the USPS, where it's competing head-to-head on the international side, is losing market share and it can't help that its former partners in overseas post offices are now setting up in the U.S. as competitors.

Lessons to Learn?

The USPS' obligation to deliver to every home six days a week is a long-standing arrangement. Maybe it's not sustainable in the 21st Century. Letter mail is no longer urgent and it won't be long before invoicing and payments go electronic. Urgent mail is now e-mail, FAX or express. Is it, therefore, right for the U.S. citizen to insist on an infrastructure that employs 800,000 people being geared to provide six days a week service when it's no longer required? A recent suggestion by USPS that it might cease to deliver on Saturdays wasn't unreasonable, given its commercial restraints and the cost of operating in a declining market. It was shouted down quickly by politicians and trade associations, but who's going to pay for the expected losses of several billion dollars over the next few years?

The world is getting smaller; the European market has already been stimulated by the overseas invasion of U.S. and Australian carriers. Prices have come down, in real terms, perhaps 80 percent compared to 10 years ago, while service levels have improved threefold. The customer is king in Europe, at least as far as parcels and freight is concerned, and will be as far as mail is concerned by 2009 when postal markets will be liberalized. This will allow competition, mergers that will improve economies of scale, better prices and better levels of service.