Parcel redux: FedEx follows UPS with bullish forecast

These are good times for the dynamic duopoly of the U.S. small-parcel industry.

Four days after UPS Inc. reported stellar second-quarter results, FedEx Corp., UPS's chief rival, announced on July 26 that per-share earnings for its fiscal first quarter, which ends Aug. 31, would be well above what it originally forecast and would come in between 81 percent and 116 percent ahead of the year-earlier period.

The Memphis-based giant said it expects earnings to be $1.05 to $1.25 a share in the quarter; its earlier forecast was for earnings to reach 85 cents to $1.05 per share. For its full fiscal year, FedEx expects earnings per share of $4.60 to $5.20, up from a range of $4.40 to $5.00. FedEx reported earnings of $3.76 per share in its previous fiscal year.

"Our revenue and earnings growth are exceeding original expectations, primarily due to better-than-expected growth" in the company's air express and ground parcel volumes, said Alan B. Graf Jr., FedEx's executive vice president and chief financial officer, in a statement.

Graf said the company is benefiting from demand for its international express and freight services. For example, FedEx's International Priority service, a time-sensitive premium-priced product, grew 20 percent in the quarter, Graf said. FedEx will issue its official first-quarter results on Sept. 16.

The FedEx announcement comes on the heels of UPS's report that its per-share earnings in the second quarter rose 71 percent over prior-year numbers. Second-quarter revenue for the Atlanta-based company rose 13 percent year over year to $12.2 billion, resulting in a 57-percent increase in operating profit to $1.4 billion. Operating margins year over year rose by well over 30 percent, the company said.

Jon A. Langenfeld, transportation analyst for the Milwaukee investment firm Robert W. Baird & Co., said the performance of both companies, along with positive comments from other transportation firms, supports the idea that freight demand will stay strong beyond the upcoming 2010 peak shipping season.

In an unwelcome but expected development for shippers, carrier pricing has lagged behind the recovery, according to Langenfeld. This implies that higher prices lie ahead for shippers as they negotiate contract renewals in the second half of 2010.

FedEx and UPS continue to enjoy favorable pricing as a result of DHL Express's January 2009 exit from the domestic U.S. market. While the incumbents have long since absorbed DHL's daily U.S. package count of between 1 and 1.5 million, the absence of a third shipping option—and the departure of the low-price leader—has led to yield improvements for FedEx and UPS and has emboldened them to take tougher lines on pricing, according to Jerry Hempstead, former vice president, national account sales, for DHL Express and its predecessor Airborne Express, and now head of a consultancy that bears his name.

An improving economy has also been a tailwind for the carriers. DHL, which continues to offer international service to and from the United States, has said it is shooting for a 10- to 15-percent growth rate for those volumes by early 2011.

According to Hempstead, UPS and FedEx have been using such code phrases as "rational pricing" and "intelligent discounting" to describe their rate strategies in the current market environment. Whereas 18 months ago, the companies would have tried to retain accounts at almost any cost, today they are increasingly walking away from business they believe offers slim profit margins, Hempstead said.

The analyst believes that with the economy growing, and with the U.S. Postal Service proposing significant rate increases on its parcel business, UPS and FedEx will feel confident coming to market in early 2011 with substantial price hikes of their own.

"This is not great news for shippers," Hempstead said.