No disrespect to Santa Claus, but FedEx and UPS wouldn't mind
stealing some of the Big Guy's thunder this Christmas season when
it comes to delivering presents.
The world's two biggest freight delivery companies could use a
strong holiday season -- driven by a rise in online shopping --
to help offset recent sluggishness in their financial
There's reason for optimism.
According to Nielsen's annual Holiday Spending Forecast,
released Nov. 18, nearly half of shoppers -- 46% -- plan to shop
online this holiday season. That's up from 30% in 2012. And
thanks to improved consumer confidence, overall spending is
expected to rise about 2%.
More online shopping means more package deliveries. And
financial results ofFedEx (
) andUPS (
) often act as an indicator for consumer spending. Combined, the
two control about 90% of the U.S. package delivery market.
"They are both making hay from strong consumer demand for
online fulfillment, and are the two likely companies to deliver
orders fromAmazon (
) and other online marketplaces," said Keith Schoonmaker, analyst
A healthy holiday season would help both companies turn around
their struggling numbers.
Memphis, Tenn.-based FedEx has logged lower or flat earnings
in three of its last five quarters. Results have been similar at
Atlanta-based UPS, which has reported lower earnings twice in the
last five quarters. The companies have been hurt on a couple of
fronts, according to a recent report from market researcher
While the economic recovery in the U.S. "continues to buoy
ground shipping volumes" this year, the report says, "weak
consumer spending impacts volumes for expensive shipping services
such as air freight."
In addition, lower prices of services have hurt revenue yields
for UPS and FedEx.
On the bright side, Trefis notes that a recovery in the global
macroeconomic environment, although sluggish, bodes well for both
UPS and FedEx. In addition, strengthening domestic markets and
weak international currencies "have increased volume shipments
and revenues, albeit at lower prices," the report said.
Dominating The Big Picture
UPS and FedEx both use aircraft and ground delivery vehicles
such as trucks, vans and even motorcycles to get packages from
one place to another. They specialize in small-parcel and
In addition to delivery services, the companies provide
logistics, supply-chain and other solutions.
Last year FedEx got most of its revenue, 61%, from its FedEx
Express service. FedEx Ground accounted for 24% of revenue and
FedEx freight contributed 12%. The rest came from other
UPS' revenue breakdown last year was similar. Its biggest
chunk of revenue, 61%, came from its U.S. Domestic Package
business. Its International Package unit contributed 22%, while
its Supply Chain and Freight unit took care of the other 17%.
FedEx and UPS are far and away the biggest players in IBD's
Transport-Air Freight group, which consists of five
UPS has about $55 billion in annual sales and provides
delivery services to more than 220 countries and territories.
FedEx logged $44.3 billion in revenue last fiscal year, which
ended in May. It also provides services to more than 220
The No. 3 company in the group,Atlas Air Worldwide Holdings (
), had $1.6 billion in sales last year. It gets revenue from a
variety of sources in addition to air cargo, including outsourced
air services and passenger flights.
Others in the group areAir Transport Services Group (
), which has about $580 million in annual sales; andAir T (AIRT),
with around $102 million.
Collectively, the stocks in the Transport-Air Freight group
are up 33% since the beginning of the year, and rank 53rd among
the 197 industries tracked by IBD.
Powerful Economic Moats
The biggest shift in the freight delivery market in recent
years, and the one driving much of its current demand, is the
ongoing rise in online shopping.
"Business-to-consumer (B2C) volume has become a higher
proportion of the freight mix ... and continues to be the fastest
organically growing package segment, driven primarily by Internet
retailing," Citigroup analyst Christian Wetherbee noted in a
recent industry report.
B2C orders will likely be the primary driver of domestic
volume for UPS and FedEx in coming months, he says, particularly
amid a sluggish environment for business-to-business
Since 2004, e-commerce has risen at an average rate of 12% a
year in the U.S. and has produced nearly $140 billion in domestic
sales so far this year.
UPS and FedEx have seen similar rises in B2C package volume.
FedEx's B2C volume has grown 10% a year since 2004, Wetherbee
notes, while UPS's has grown 7% a year.
As online orders grow, so will business at UPS and FedEx
because of their dominant positions in the ground delivery
"They both have powerful economic moats regarding future
returns and competitive advantage," said Morningstar's
He cites DHL's decision a few years ago to exit the ground and
air express markets in the U.S as evidence of the "powerful hold"
that UPS and FedEx have on the domestic industry.
There's ample room to grow business overseas as well. For now,
however, international markets continue to pose challenges to
both UPS and FedEx.
"We've seen a slowing of international express shipments
that's happened since the recession," Schoonmaker said. "Both UPS
and FedEx have been right-sizing their capacity to match lower
demand for international shipping."
Neighborhood Market Share
Because freight shipping companies rely so heavily on consumer
and business spending, they are particularly susceptible to
If the U.S. economy continues to improve -- and overseas
markets follow suit -- UPS and FedEx stand to benefit.
The near-term outlook looks rosy enough. Analysts expect FedEx
to report a 12% earnings gain this fiscal year, which ends in
May. They see fiscal 2015 profit rising 26%.
UPS, which operates on a traditional calendar fiscal year,
should deliver 5% earnings growth in 2013 and 15% growth in
One thing analysts will keep an eye on is how freight delivery
companies deal with the higher expenses associated with online
Wetherbee notes that in the B2C market, carriers don't usually
visit each residence in a neighborhood every day. So when more
packages are delivered, it usually means more stops per driver --
and higher costs.
But as volume density in the B2C market increases, these costs
should come down.
"It is more likely that UPS or FedEx will at least be in each
neighborhood every day, limiting the incremental expense of
delivering to more homes," Wetherbee said. "But pricing still
needs to be increased to ensure that the incremental stops do not
result in margin pressure."
New technologies continue to play a key role in helping FedEx
and UPS operate more efficiently.
Trefis notes that FedEx Ground has introduced automatic
planning systems across its major hubs, designed to improve
transit times across numerous shipping lines. This effort should
lead to higher operating margins in future quarters.
Meanwhile, UPS looks to lower its operational and fuel
expenses by increasing the rollout of its On-Road Integrated
Optimization and Navigation (ORION) software.
ORION is designed to improve ground-fleet delivery times and
lower fuel costs by optimizing the efficiency of routes.
"UPS expects complete integration of its proprietary ORION
software within the 55,000 operational routes in the U.S. by
2017, and a global roll-out subsequently," Trefis noted.