UPS and FedEx's modest quarterly earnings are offset by the growth of their international businesses

A slowing American economy, high fuel prices, too much capacity and slackening demand may collectively account for why UPS's first quarter results and FedEx's fiscal third-quarter earnings were relatively flat, particularly in the domestic business.

"The first quarter of 2007 has turned out to be a bust" for UPS and much of the air freight business, said Ned Laird, president of the Seattle-based Air Cargo Management Group. "There is no growth in the domestic market and virtually no growth in the to-and-from U.S. markets."

But the reports also suggest UPS and FedEx are riding out what some believe are fundamental changes in their domestic businesses by spreading into other areas, including growing international air business, that is keeping them solidly profitable.

Atlanta-based UPS' first quarter net profit dropped 13.5 percent to USD 843 million compared to USD 975 million the company earned in the first three months of 2006 and came on a 3.3 percent gain in revenue, to USD 11.9 billion.

Overall domestic package volume slipped 0.2 percent, with ground parcel business down slightly. But premium overnight air express revenue fell 1.8 percent and deferred air revenue was off 3.5 percent as yield in the air express business softened. Volume in the domestic air business was down 1.1 percent from last year.

International package revenue grew 10.4 percent, but margins fell. The $375 million operating profit, before adjustments for special charges, was 6.1 percent below last year.

The Supply Chain and Freight business posted a $46 million operating profit after losing USD 25 million in the year earlier quarter.

Memphis Blue

FedEx revenue was up 7 percent to USD 8.6 billion for the quarter ended Feb. 28, but the USD 420 million net profit was down 2 percent from the year earlier period.

Overall domestic package volume dipped 1.6 percent. And International Priority volume dipped 1 percent.

"The U.S. economy grew at a lower rate than we expected in the third quarter," said Frederick W. Smith, chairman and chief executive officer. "However, this represents a healthy transition for the economy as it phases into a more sustainable growth rate."

Despite the different operating philosophies of FedEx and UPS, "they seem to be performing almost at the same level in their express operations," said Satish Jindel, president of SJ Consulting Group. With UPS ground traffic showing no volume gains while FedEx Ground had a net gain of 272,000 packages a day, a 9 percent increase, it appeared FedEx showed a slight gain in market share, probably coming from UPS, said Jindel.

For the carriers, said Jindel, is that there appears to be little pricing pressures on either UPS or FedEx. The pricing appears relatively stable despite DHL's push to reclaim a share of the market it had lost in the past year, suggesting DHL is not discounting heavily to get back some of that business. The soft yields, however, suggest UPS and FedEx are not getting nearly the rate increases they expected this year, particularly the aggressive 4.9 percent price hike UPS announced.

But the revenue at both companies is spreading across more lines of businesses, limiting the importance of rate fluctuations in any one area. Both FedEx and UPS are adding industrial less-than-truckload operations, for instance, to get some of the very business that is luring shippers away from pricier domestic parcel services. Both integrators hope the end result will be greater product control across the transport supply chain, and that could positively affect future quarterly revenue.

Although earnings of both companies can be viewed as examples of global economic activity, Norbridge's Clair cautioned against using the quarterly results as an economic bellwether.