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
United Parcel Service
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.
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,
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.
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."
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.
As FedEx and UPS have been building global networks, demand for these services has skyrocketed.
"What used to be a 2,000-mile supply chain between Michigan and a supplier in Monterey is now an 8,000-mile supply chain, with the supplier in Shanghai," Clancy says. "With an 8,000-mile supply chain, the probability of a screw-up goes way up. There are customs issues, security issues, chokepoints at ports and railroad issues. Express-package shipping is the mistake-recovery network for global transportation."
Meanwhile, the overnight-package carriers are spared many of the potential chokepoints that passenger airlines battle in the domestic air transportation system, such as security, competition for gate space and late-afternoon takeoffs at congested airports. They're also spared many of the demands that come with carrying passengers.
"Boxes don't have to take their shoes off to go through security, and they don't care what time they fly," Heimlich says. "Also, they don't need to be fed, they don't care if they have to connect, and they can be packed very densely."
Talking at Length
Of course, success means that you can buy what you want, when you want it. UPS' Louisville hub expansion will increase its package-sorting capacity by 60% and add aircraft-docking capacity.
The project "conveys an optimistic view of both the secular growth trend in its international-package business, as well as growth of the domestic-express market and its ability to grow domestic-express at above-market rates," wrote JPMorgan analyst Thomas Wadewitz in a recent research report.
UPS recently completed a $135 million hub expansion in Cologne, Germany, and plans to build a Shanghai hub by 2007. Wadewitz says he foresees expenditures close to $3 billion annually over the next several years as UPS "continues to focus on capacity expansion." During the past 12 months, JPMorgan has provided investment banking and other services to UPS.
FedEx also has money to spend. The company has "great free cash flow and (has made) another pledge to use it," wrote Bear Stearns analyst Edward Wolfe in a recent report. Wolfe adds that the company says it "intends to more aggressively use its balance sheet to repurchase stock and seek large acquisitions."
The purchase of Watkins, the country's ninth-largest less-than-truckload carrier, is one example. During the past 12 months, Bear Stearns has provided securities-related services to FedEx.
All the while, the pace of labor talks reflects a distinct lack of urgency. UPS and its pilots have been negotiating since October 2002. There have been no formal talks since December, but a federal mediator has denied the union's request to declare an impasse. Most recently, delays have resulted from a dispute between the union's leadership and its negotiating committee.
In the FedEx talks, company spokesman Maury Lane says pilots have rejected two offers, the latest of which would raise the average salary to $215,000 from $183,000. Pilots say the actual salary is far lower, but didn't offer a specific number. "This process can take a long time, as UPS has shown, but we are working very hard to conclude these talks," Lane says.
Webb suggests he's ready to get a deal done. "Our company is generating $30 billion a year in revenue. Two-thirds of that comes from the airline, we're 27 months into negotiations, and they have publicly declared that they want to increase our compensation," he says. "It's time for them to write the check."