Cargo Kings Fly High

Fuel costs and labor disputes have led to tremendous distress at passenger airlines in recent years, but the cargo carriers never seem to complain.

Not that they necessarily should. Consider that FedEx (FDX) and United Parcel Service (UPS) have racked up profits of $22 billion during the past five years, compared with the passenger-airline industry's losses of $35 billion over the same period.

Make no mistake, FedEx and UPS are both in the airline business. UPS likes to say it operates the "ninth-largest airline in the world," with 268 jet aircraft. FedEx has a fleet of 384 jets, which would make it the seventh-largest in that regard. In recent years, package shippers have proven far more capable of benefiting from their assets than passenger carriers.

Perhaps the biggest difference in operating environments was demonstrated last week when UPS raised its air-delivery fuel surcharge to 16% from 12.5%. In fact, the company adjusts its fuel surcharge monthly, and FedEx has a similar program. Market dominance gives the two carriers the ability to pass on cost increases.

By contrast, UAL's (UAUA) United Airlines says recently that during the first quarter, it proposed 16 major domestic-fare increases. Six actually stuck.

Oligopoly at Work

Another difference: Last month, UPS announced it would spend $1 billion to upgrade its Louisville hub, and FedEx says it would pay $780 million to buy trucking company Watkins Motor Lines. On the passenger side, AMR's (AMR) American Airlines, which operates 312 aging, inefficient MD-80s that it wants to replace, doesn't intend to buy any new jets until it starts making money again.

Ongoing labor negotiations are still another distinction. The past three years, passenger airlines have been negotiating new labor contracts in bankruptcy court, forcing unions to make concessions quickly or risk having a judge allow the companies to impose even more severe terms.

There hasn't been a similar rush to get deals with pilot unions at FedEx and UPS.