UPS, FedEx optimistic about 2006 despite challenges

UPS Inc. and FedEx Corp., the two U.S. parcel giants, told investors here they see the rest of the year being at least comparable with and probably superior to the boom that was 2005.

However, they also said they grappled with continuing operating challenges. Both rivals are dealing with labor issues.

An executive with the U.S. Postal Service also attended the Bear Stearns Global Transportation Conference. He said the post office is trying to get a 13.8% increase for its Express and Priority.Mail services to start May 2007, because the service conducts its operations without the fuel surcharges that are so common to for-hire carriers.

"The economy is steady now, but will be more challenged going forward," UPS Chief Financial Officer Scott Davis said, referring to difficulties that could be caused by rising energy prices and interest rates.

"But we think the small-package sector will grow faster than the economy," he added.

James Hudson, a FedEx vice president, said he thinks business could be particularly good because "we're expecting industrial production to grow by 3.7% this year, up from 3.2% last year." He also said he sees 2007 as a "stable" year.

The contracts for unionized airline pilots is the common labor issue that affects the Nos. 1 and 2 carriers on the TRANSPORT TOPICS 100 list of the largest for-hire carriers in the United States and Canada.

UPS and FedEx trucks make deliveries along a crowded New York street. Both firms continue to deal with labor issues.

Hudson said FedEx expects "we'll be back at the [negotiating] table [this] week. We've made two excellent offers to solve this, but so far. we re still apart." The pilots are the only unionized employees at FedEx.

Davis said talks between UPS and its pilots are still in recess and the mediator has to set a date for the talks to resume.

UPS, the nation's largest single employer of Teamsters union workers, faces contract-renewal negotiations in two years. The current contract expires in July 2008, a year in which the Teamsters also must negotiate contracts with less-than-truckload carriers and vehicle haulers.

'We'd like to get this done early in 2008 so we don't lose packages to nonunion companies." Davis said. He added that he does not see the Teamsters creating an uproar over the nonunion status of its LTL carrier UPS Freight, the former Ovemite Transportation.

"I think the Teamsters recognize that our nonunionized supply-chain division helps build package volume for them." he said.

Davis also said the company is trying to smooth relations with franchise owners of the corporations local UPS Store outlets.

Conference participants questioned FedEx about labor issues at its FedEx Ground division that uses owner-operators to drive its trucks. Several lawsuits against the truck-based parcel courier have been consolidated before a U.S. District Court judge in South Bend, Incl.

"Our contractor model has been tested and retested again. The current litigation will again prove that point, but it may take some time," FedEx's Hudson said.

In a panel discussion later that day, the chairman of a Northeastern regional parcel courier said the legal classification of owner-operators as independent contractors or company employees is crucial. "Five years ago this sort of thing was unheard of." said Ted Kauffman of Eastern Connection, referring to the owner-operator litigation.

"Now we're trying to get legislation to address the issue," he said. Kauffman added that the law concerning owner-operators in New Jersey is particularly hostile to carriers.

Jim Cochrane, manager of package services for the post office, said the U.S. Postal Service has seen some volume growth in the three service lines that compete most directlv with UPS and FedEx. For the six months ended March 31, the first half of the postal fiscal vear. Express Mail volume was up 3.9% to 28.3 million pieces from a year ago: Priority Mail was up 7% to 490.4 million pieces: and total package services was up 3.6% to 624.8 million pieces.

However, fuel prices also rose substantially, he said, costing the post office a total of 8500 million during the same period.