Cargo Kings Fly High

The UPS contract became amendable at the end of 2003, and the FedEx contract became amendable at the end of 2004. Negotiations have been going on for two years at FedEx and for four years at UPS.

Success has come to the overnight package industry because barriers to entry are high and four companies -- FedEx, UPS, the U.S. Postal Service and Germany's DHL -- control 90% of the business, says Brian Clancy, managing director of MergGlobal, an Arlington, Va., transportation-consulting firm.

"The small-package business is essentially an oligopoly, and oligopolies tend to be relatively stabile from a competitive perspective," Clancy says.

Clancy says it's nearly impossible to enter a business where the leading companies have spent decades establishing global distribution networks. "In the passenger airline business, you can be in business if you offer just a few routes," he says. "But in the overnight business, you go to every zip code and international, and these networks are hard to build."

The networks are so expansive that in some countries, overnight carriers -- unlike passenger carriers -- have won rights that allow them to fly between cities in two foreign countries, notes John Heimlich, economist for the Air Transport Association.

As a result of their market dominance, Fed Ex and UPS and their handful of competitors have been able to control pricing in their industry. The two "have a rational approach to pricing," says Dave Webb, president of the FedEx chapter of the Air Line Pilots Association. "They don't seem to feel they need to annihilate each other to prosper."

Networked World

Additionally, they've been able to pass on the full effect of fuel-price increases, says Ben Baldanza, CEO of Spirit Airlines. "This industry isn't good at doing that because there are still a lot of seats being flown," he says.