Dive Brief:

• LaserShip and OnTrac announced Wednesday they entered a "definitive agreement to merge." It's a deal that experts say will create a giant among the regional parcel carriers and provide shippers with a consolidated option for e-commerce deliveries in the U.S.
• The agreement will give LaserShip, which delivers in the Eastern and Midwestern U.S., a delivery presence in eight Western states, including all of California. The deal, which was first reported by Business Insider, is valued at $1.3 billion according to Moody's.
• Combined, the companies "will form the first coast-to-coast partner of choice for last-mile e-commerce deliveries," according to the announcement. But the two carriers won't begin to link their networks together until 2022 in order to "ensure continued exceptional service through the holiday season with expectations of heightened shipping volumes," it said.

Dive Insight:

Regional carriers have seen a surge in volumes during the pandemic as more shippers look for last-mile options outside the FedEx-UPS duopoly, and they're leveraging that demand to expand their networks and bolster their services. LaserShip had been expanding its coverage this year, and buying OnTrac turbocharges that effort.

"In due time, they will be either organically, or with acquisition, looking to fill out the Midwest and the Southwest," said Satish Jindel, president of SJ Consulting Group. However, he added that LaserShip and OnTrac's focus area of B2C deliveries relies on regional networks, meaning a fully national network isn't a requirement for success.

Compared to other regional carriers, LaserShip and OnTrac's combined reach is unmatched. LSO serves the Southwest, United Delivery Service covers the Midwest and Courier Express covers the Southeast, but they and fellow regionals don't cover both coasts.

Still, the two together don't have the nationwide coverage or financial muscle of FedEx or UPS. LaserShip made $715 million in revenue last year, while OnTrac made $832 million, according to SJ Consulting Group data. FedEx and UPS both had revenues of more than $80 billion in their previous fiscal years.

But both regional carriers are growing fast. In 2020, LaserShip's revenues grew 58% YoY while OnTrac's grew nearly 35% YoY, according to SJ Consulting. This happened as the term "carrier diversification" became fashionable among businesses looking to avoid surcharges and capacity restrictions from FedEx and UPS for home deliveries.

"The most immediate impact for ecommerce retailers will be faster and easier contracting relationships with a larger regional network," Jason Murray, CEO of Shipium, said in an email. "Time has passed for it to matter for 2021 peak, but starting in Q1, retailers can work with one entity to establish a business contract that governs both LaserShip and OnTrac networks. This means we will see an even faster acceleration of the 'Great Regional Diversification' that we saw this year."

Dean Maciuba, managing partner of North America for Last Mile Experts, said the deal might benefit FedEx and UPS as well. The two major carriers have both made it clear they're prioritizing higher-yielding commercial volumes rather than every residential delivery they can get their hands on.

"Maybe FedEx and UPS don't care if they lose this crummy residential business or the worst of the worst to the regionals," Maciuba said. "Is that good for the regionals because they can manage it more profitably, because they're so much leaner, because they're so much less cap-intensive, because they're regional? It might work for both sides."