BEFORE THE FEDERAL MARITIME COMMISSION

I. INTRODUCTION

In accordance with the Federal Maritime Commission’s regulations at 46 C.F.R. §502.67, United Parcel Service, Inc. and its wholly-owned subsidiary, UPS Ocean Freight Services, Inc. ("UPSOFS") (collectively, United Parcel Service, Inc. and UPSOFS are referred to herein as "UPS") request that the Commission grant an exemption pursuant to Section 16 of the Shipping Act of 1984 (the "Act") to permit UPSOFS to utilize confidential service contracts with its shippers.

UPS is a worldwide surface and air freight carrier providing service as both an ocean transportation intermediary ("OTI") and non-vessel operating common carrier ("NVOCC"), as such are defined in the Act. UPS transports substantial volumes of freight which move via vessel-operating common carriers ("VOCCs") in end-to-end connection with UPS's other transportation modes.

Many of UPS's shippers, both large and small, depend on UPS both for transportation and full-service global supply chain management solutions, including features such as labeling and tracking of freight shipments, document processing, customs clearance, warehousing, "just-in-time" inventory delivery capabilities and specialized trade financing. In order to fulfill shipper service requirements, and to meet competition from large vertically-integrated VOCC organizations that also own or control OTIs, UPS needs the flexibility to negotiate and perform confidential service contracts with shippers covering the entire end-to-end movement.

An exemption to permit UPS to offer service contracts subject to Section 8(c) of the Act and the Commission's service contract regulations is necessary and appropriate in light of industry developments since enactment of the Ocean Shipping Reform Act of 1998 ("OSRA"), including ownership of OTIs by large VOCCs. The proposed exemption is consistent with the intent of Congress in enacting OSRA in 1998. Although Congress decided at that time to allow service contract authority only to VOCCs, there have been substantial changes in industry conditions since the Congressional deliberations in 1998. UPS, with its large asset base and strong presence in the surface and air freight industries, does not exemplify the concerns that Congress expressed about expanding service contract authority during the OSRA debate.

The requested exemption will promote commerce, and will not result in any reduction of competition. UPS will show that there is substantial support for this exemption among shippers.

II. STATEMENT OF EXEMPTION REQUESTED

United Parcel Service, Inc. and its wholly-owned subsidiaries, including UPSOFS, hereby request an exemption pursuant to Section 16 of the Shipping Act of 1984, as amended, 46 App. U.S.C. §1715 (the "Act"), to permit UPSOFS, a Non-Vessel Operating Common Carrier as defined in Section 3(17) of the Act, to enter into and perform service contracts, as defined in Section 3(19) of the Act, in the manner permitted in and subject to the requirements of Section 8(c) of the Act and subject to the Federal Maritime Commission's regulations at 46 C.F.R. Part 530[1].

III. JUSTIFICATION FOR EXEMPTION

A. BACKGROUND

1. UPS Corporate Profile

UPS, a Delaware corporation, was founded in 1907. UPS is the world's largest package delivery company and provider of specialized transportation and logistics services, serving some 200 countries worldwide.

Statistics regarding UPS are set forth in Appendix "A" to the attached Verified Statement of Michael Gargaro ("Gargaro Statement"). UPS, with 2002 corporate revenues of $31.3 billion, has 360,000 employees. UPS delivers some 3.4 billion packages and documents annually, including 13.3 million daily global deliveries, two million daily U.S. domestic air packages and documents and 1.2 million daily international packages and documents. On a daily basis, UPS picks up from 1.8 million customers and delivers to an average of 6.1 million U.S. and international addressees and consignees.

UPS operates from 1,748 facility locations worldwide. The company operates a fleet of 88,000 trucks and other vehicles, and 581 aircraft. UPS flies nearly 1,900 daily air freight segments serving 364 U.S. airports and 405 terminals overseas. Principal UPS air freight hubs are in the U.S., Canada, Europe and South and East Asia. UPS capital expenditures average $2 billion annually. UPS's transportation assets, including aircraft, vehicles, terminals and technology, exceed $25 billion on a cost basis and $13 billion on a depreciated basis. Gargaro Statement, at 3 and Appendix "A."

UPS is a publicly-traded company. Its shares, traded on the New York Stock Exchange, have a current market capitalization of $33.2 billion.

2. UPS International Parcel Shipping Service

As international volumes have grown, UPS has increasingly relied on ocean common carrier services to move containerized shipments of parcels for its customers. UPS combines ocean freight movements with its surface and air delivery capabilities to offer shippers the right combination of delivery times and economics for their needs. To provide the most comprehensive service at all levels, UPS has also made strategic acquisitions, like that of the Fritz Companies, Inc., a full-service global freight forwarder, customs brokerage and warehousing firm.[2]

UPS does not own or operate any vessels. All UPS ocean freight is shipped via ocean common carriers, in many instances pursuant to service contracts entered and performed pursuant to the Shipping Act and the Commission’s regulations. UPS's service contracts with VOCCs range in volume up to 10,000 20-foot equivalent units ("TEUs"). In other cases, depending on volume and routing, UPS ocean shipments move in accordance with VOCC tariffs, or they may be shipped under UPSOFS’s own NVOCC tariff[3] or through arrangements with other NVOCCs under their tariffs, or via other OTIs. Gargaro Statement at 13.

UPS moves approximately 300,000 TEUs of ocean freight annually. UPS serves a number of larger ocean freight shippers moving up to 4,000 TEUs each year. However, the majority of UPS's ocean movements are provided by shippers moving an average of about 350-500 TEUs annually. Such smaller shippers are typically suppliers to larger manufacturers or retailers importing products from overseas sources to consolidation, manufacturing, assembly, warehousing and delivery points in the U.S. Unlike bigger companies, these smaller shippers have few internal transportation or trade finance resources. They look to UPS to provide a "portfolio solution" covering aspects of their business from vendor management, packing and bar code labeling for tracking and processing purposes, loading and transport, to customs clearance. In many instances, UPS locates its own facility adjacent to the shipper’s consolidated freight terminal or factory, or next to the shipper’s customer’s facility, to provide "vendor-managed inventory services." This allows the shipper's customer to avoid the cost of carrying inventory while still having access to goods on a timely basis as needed. Gargaro Statement at 13-14.

UPS also manages the flow of information and trade financial services that facilitate movement of parcel freight through its UPS Supply Chain Solutions Group. UPS Supply Chain Solutions Group offers logistics, global freight, trade finance and consulting to enhance customers' business performance and improve their global supply chain management. UPS Supply Chain Solutions can manage complex transportation networks, carriers and multi-modal shipments, and deliver orders anywhere through its global network. UPS can put together the most effective solution for each shipper, using ocean, air, road, or rail. UPS manages the transportation details for the shipper, including shipment booking, carrier routing, tariffs, customs and documentation requirements. While the shipper's goods are in transit, the UPS information system provides visibility in the transportation process via the Internet, providing information on all aspects of the shipments. Gargaro Statement at 13-16.

For shippers whose goods can move most efficiently by ocean freight for all or part of the route, UPS has developed its UPS Trade Direct^SM Ocean service. This service is presently available from locations in Asia and Brazil for inbound shipments to the United States. Trade Direct^SM Ocean provides a port-to-door distribution center bypass delivery solution for U.S. importers that simplifies logistics management, reduces costs, and minimizes the risk of loss or product damage. Gargaro Statement, Appendix "B." Based on purchase order allocation and distribution information, UPS labels are placed on individual packages at the Customer's container freight station at the point of origin. Packages from ocean containers arriving at a U.S. port are fed directly into the UPS small package delivery network upon arrival and clearance in the United States. For larger deliveries, Less than TruckLoad ("LTL") service is also available. Id.

Examples of comprehensive, customized supply chain management solutions created by UPS for smaller shippers are described in the Gargaro Statement at 14.

UPS has future plans for expansion of all these services, and will constantly develop new, innovative service features for its shippers as the industry changes.

B. PROPOSED UPS SERVICE CONTRACT OPERATIONS

With service contract authority, UPS would be able to satisfy growing shipper demand to offer a single confidential agreement covering all aspects of UPS's global transportation and supply chain management services. In a single comprehensive contract, UPS could provide unique, customized service packages to each shipper, charging rates appropriate to the specific needs and traffic flow of the shipper.

Without service contract authority, this is impossible. Rates are not confidential, and the parties cannot obtain the most efficient top-to-bottom pricing for the customized package of service features the shipper receives. The parties cannot effectively cope with changes in ocean cargo volume. Additionally, without the shipper's volume obligation provided by a service contract, UPS cannot reliably negotiate the best service and rate packages with VOCCs which would enable UPS to provide the optimal pricing for the shipper.

Under the requested exemption, UPS would implement its service contract business in accordance with the Commission's regulations at 46 C.F.R. Part 530. UPS service contracts and amendments would be filed with the Commission and notices and essential terms would be published, as required in 46 C.F.R. §530.5 and §§530.8 through 530.12 and Appendix A. UPS would be subject to the same regulatory requirements as other carriers using service contracts.

C. CHANGES IN OCEAN FREIGHT INDUSTRY SINCE ENACTMENT OF THE OCEAN SHIPPING REFORM ACT OF 1998, AND GROWTH OF INTEGRATED LOGISTICS SERVICES WARRANT USE OF SERVICE CONTRACTS BY UPS

1. Emergence of the Integrated Logistics Industry

During the last five years, various world economic, competitive and technology factors, as well as improvement of supply chain management techniques and innovative service offerings by freight carriers in all modes, have led to the emergence of new integrated logistics services in place of traditional stand-alone or end-to-end multimodal freight services. Increased international sourcing of components for manufactured goods, competitive practices in the field of production management and application of systems management technologies have caused supply chain management to become a crucial element of major multinational corporate strategies.

Key considerations in supply chain management include cost controls, reduction of transit time to shorten order times and cut inventory carrying cost, predictability of transit times, tracking of goods to assure arrival and availability, streamlining of documentation and processing at international frontiers, automation of inspection, quality control and compliance systems, negotiable title documentation from upstream points in a form conducive to in-transit inventory financing, flexibility in routing, ability of carriers to assemble various multimodal services in a manner most advantageous to the shipper, and warehousing systems and locations to provide "just-in-time" deliveries either to the shipper or shipper’s customer. Large multinational companies have developed methods to maximize their advantages at each level of the supply chain, enabling them to be highly competitive while improving profit margins.

While large shippers have led the way, the demand for such service features applies equally to many smaller or mid-sized shippers. Large manufacturers and distributors often require small suppliers to locate their facilities adjacent to the big company's production center, in order to provide nearby availability of goods for inspection and "just-in-time" deliveries. In other cases, smaller companies independently occupying profitable product market niches can take advantage of better supply chain management service features, if created in response to the needs of large-volume shippers. Once the necessary capital investment and technology development has been undertaken by the carriers to bring a new service feature on line in response to big shipper demands, they can eventually make it available to shippers moving smaller volumes. Gargaro Statement at 8-12.

The Commission has recognized the substantial impact of the growth of the integrated logistics industry on liner shipping. See, Federal Maritime Commission, The Impact of the Ocean Shipping Reform Act of 1998 (2001) ("FMC OSRA Report") at 14.

2. Consolidation of VOCCs

In the five years intervening since enactment of OSRA, there has been considerable consolidation among the VOCCs. As the Commission has observed, the percentage of global containership capacity controlled by the 20 largest VOCCs has increased from about 50 percent in the period when OSRA was being legislated to well in excess of 80 percent today. FMC OSRA Report, at 15. In 1998 there were still a half-dozen larger carriers with relatively smaller market shares on most U.S. trade routes. Today two such VOCCs – Maersk Sealand and APL – have substantial market power in several key US trades. See Appendix "C" of Gargaro Statement. There has also been considerable consolidation among the next layer of VOCCs just below these large companies. As a result, the competitive landscape at the VOCC level has significantly changed from that Congress was addressing in 1998.

3. VOCC Ownership of and Control over OTIs

To meet shipper demands, larger VOCCs have now established, acquired or affiliated closely with OTIs providing upstream consolidation, forwarding and processing functions covering the full range of integrated logistics services. These companies have very substantial asset bases, in the billions of dollars, and operate comprehensive global services. See table at Appendix "D" of the Gargaro Statement.

UPS faces substantial head-to-head competition from Maersk-Sealand and its affiliate Maersk Logistics International A/S, based in Copenhagen. Maersk operates 281 vessels with a capacity exceeding 750,000 TEUs in worldwide liner services. Maersk Logistics offers supply chain management, international forwarding, air freight, warehousing and distribution, vendor management, quality assurance, customs brokerage and information management services for its shippers. Gargaro Statement at 18.

Another typical large, vertically-integrated competitor is APL. Part of the NOL Group headquartered in Singapore, APL operates 74 vessels and 450,000 containers in worldwide liner trades serving over 100 countries. APL's affiliate APL Logistics is the fastest-growing business unit in the NOL Group, with an impressive 29 percent annual expansion rate. APL Logistics is a global leader in supply-chain management, offering forwarding vendor management, warehousing and consolidation services. With services including consulting and advanced information technologies, APL Logistics now maintains 15 offices in 55 countries. It also operates a system of more than 200 warehouses. Gargaro Statement at 18-19.

Other large VOCCs which offer comprehensive supply chain management services include Hanjin Line, Hyundai Merchant Marine, K-Line, NYK, Yang Ming, P&O Nedlloyd, CMA-CGM, Mitsui OSK and Zim Israel