Shippers Absorb Oil Shock

No worries.

You'd expect the rising price of oil to hurt shippers like FedEx (FDX Quote - Cramer on FDX - Stock Picks) and UPS (UPS Quote - Cramer on UPS - Stock Picks), which have massive fleets of planes and vehicles deployed around the globe. But it is not. Even as oil sits at historically high levels, FedEx says business is better than ever, and UPS continues to pay hefty dividends to shareholders.

There are various reasons why high energy prices haven't hurt the shippers. First and foremost, surprisingly enough, fuel costs are a minor part of the massive shipping business, far less than what is spent on wages and infrastructure. Also, unlike other industries, shippers pass along the rising costs to customers without sapping demand, and ultimately, companies have found innovative ways to ensure that vehicles sip instead of slurp fuel.

In FedEx's fiscal 2004, which just ended in June, the company spent nearly $1.5 billion on fuel, about the same amount as Northwest Airlines (NWAC Quote - Cramer on NWAC - Stock Picks) in its last fiscal year. At Northwest, fuel is the second-largest expense, accounting for nearly 16% of its total costs, but at FedEx, whose revenue is more than double Northwest's, fuel is the sixth-largest expense, just 6.4% of total costs.

The staggering size of FedEx's operation means that the 10% jump in fuel costs seen in fiscal 2004 is a drop in a very large bucket that is far more sensitive to the overall economic outlook than one variable like oil. Citing the economy's strength, FedEx surprised some Wall Street hands on Monday by boosting earnings guidance for fiscal 2005 and its upcoming quarter, the results of which will be released on Sept. 22.

"We have strong momentum in our businesses and believe the economy continues on a sustainable expansion path," said Alan Graf, company CFO. "While there are potential risks on the horizon, such as prolonged oil costs that could impact the worldwide economy, we believe we will continue to see strong demand, which will result in higher earnings."

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