The gift-giving season paid off well for package delivery companies like FedEx Corporation ( FDX">FDX ) and United Parcel Service Inc. ( UPS ). Not only did they gain from the surge in holiday-driven sales, they are now gaining from gift returns courtesy of online shopping.
The easy access to products through online shopping, coupled with attractive offers like free shipping by many retailers have attracted customers like never before. According to market sources, online shopping registered a growth of approximately 15% over the last month.
As may be expected, returns related to online purchases are substantial, since products purchased online cannot be tried on, touched, or felt. Therefore, once this is done, there is often a need to exchange. This is naturally good news for shippers like FedEx and UPS, which carry out the shipments irrespective of whether they are first-time purchases, or returns.
Similar to the Christmas season, both these companies expect to report higher volumes driven by returns. UPS expects the first week of January to bring over half a million package deliveries related to gift returns, or roughly an 8% growth year over year, and FedEx foresees no less with sales likely to remain strong throughout this month.
To meet this growth in demand, both FedEx and UPS also ramped up hiring. In November last year, UPS reportedly hired approximately 55,000 seasonal workers. FedEx hired approximately 20,000 seasonal employees, compared with approximately 17,000 in the 2010 holiday season.
Both companies have raised their freight rates over the past year. UPS raised its general rate by 4.9% on ground packages, air express and U.S. origin international shipments, effective January 2011, followed by a freight rate hike of 6.9% on non-contractual shipments in the U.S., Canada and Mexico since August. In September, FedEx implemented a general rate hike of 6.75% followed by an average rate hike of 3.9% in U.S. domestic, export and import services in October.
Given the strengthening of freight market fundamentals, FedEx, along with its peers like UPS have remained successful in implementing rate hikes. Further, the stringent cost control measures adopted by the U.S. Postal Service, ultimately affecting its quality, has also aided these companies to gain significant market share.
It remains clear that the surge in freight volumes coupled by favorable pricing will remain the key growth drivers for these companies, boosting near-term results.
We are currently maintaining our long-term Neutral recommendation on UPS and FedEx.