Case Study of Fedex and UPS

8 August 2016

The location could not have been more appropriate. China was shaping up to be the world’s most significant market for air cargo, and Yan Yuanyuan, director general of China’s General Administration of Civil Aviation, had just announced that China would be opening up its air cargo market to an even greater degree.

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The major global cargo companies had been picking up their level of investment in China and were poised for growth: FedEx Corp. had just begun construction of a major regional hub in Guangzhou and already had over 200 Chinese cities in its international network, and United Parcel Service of America, Inc. (UPS), was just completing a new logistics hub in Shanghai and had recently begun domestic Chinese express package services. The question on the minds of many was which of these two cargo giants was going to make the most of this opportunity.

Spurred in part by entry into the World Trade Organization in 2001, growth in trade with China had accelerated and the need for cargo shipment and logistics support had skyrocketed. On June 18, 2004, the United States and China reached a landmark air-transportation agreement that quintupled the number of commercial cargo flights between the two countries. The agreement also allowed for the establishment of air-cargo hubs in China and landing rights for commercial airlines at any available airport. The pact represented the most dramatic liberalization of air traffic in the history of the two nations.  had been quicker to seize the new opportunities this agreement presented. By year-end 2005, it operated more all-cargo flights to China than any other airline. During 2005, the company launched the express industry’s first direct service to China (from Europe). In January of 2006, FedEx announced that it would buy out the remaining 50% of a Chinese joint venture started in 1999 with local carrier Tianjin Datian W. Group. Upon closing that deal, FedEx would employ more than 6,000 people in China. At the announcement of the buyout, Frederick W.

Smith, chair, president, and CEO of FedEx, said: “China is changing the world’s economic landscape. This strategic investment in the long-term growth of China will broaden This case was prepared by Associate Professor Marc Lipson, Robert F. Bruner, and Sean Carr. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright ? 2009 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected] com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means— electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. -2- UV2561 and deepen our relationship by improving access to important markets, fueling economic development for years to come. ”1 While UPS currently lagged behind FedEx in the Chinese market, it was still the world’s largest package-delivery company and the dominant parcel carrier in the United States.

UPS was the first carrier in the industry to offer nonstop service from the United States to China. It had recently completed a partner buyout of its own, acquiring full control of an express delivery service in China. While not the dominant player in China, it was dominant globally. According to UPS Chief Financial Officer D. Scott Davis, “Our industry is critical to international trade, our position in this industry is strong, and we have a track record of delivering exceptional financial results. ”2 With the continued maturing of the U.S. package-delivery segment, the international markets—and especially China—became a battleground for the two package-delivery giants. FedEx had virtually invented customer logistical management and was widely perceived as innovative, entrepreneurial, and an operational leader. Historically, UPS had a reputation for being big, bureaucratic, and an industry follower, but “Big Brown,” so called for its iconic trucks and uniforms, was aggressively shedding its plodding image as it too became an innovator and a tenacious adversary.

UPS had recently undergone a major image overhaul and was repositioning itself as a leading provider of logistics and supply-chain management services. As these two companies positioned themselves to seize the growth opportunities presented by the Chinese market, the central question was which of these companies would best convert these opportunities into wealth for investors. Both companies made financial performance a part of their mission—what FedEx called “superior financial returns” and UPS called “long-term competitive returns.

”3 Since the business models of the two companies had largely converged, with FedEx boosting ground capabilities and UPS boosting air capacity, success would hinge on execution, particularly financial execution. FedEx Corporation FedEx first took form as Smith’s undergraduate term paper for a Yale University economics class. Smith’s strategy dictated that FedEx would purchase the planes that it required to transport packages, unlike other competitors, which used the cargo space available on passenger airlines.

In addition to using his own planes, Smith’s key innovation was a hub-andspoke distribution pattern, which permitted cheaper and faster service to more locations than his competitors could offer. In 1971, Smith invested his $4 million inheritance, and raised $91 million in venture capital to launch the firm—the largest venture-capital start-up at the time. 1 “FedEx Express to Acquire Express Business of Chinese Transportation Company DTW Group,” FedEx press release, January 25, 2006. 2 UPS annual report, 2005. 3UPS and FedEx annual reports, 2005. -3- UV2561.

In 1973, on the first night of continuous operation, 389 FedEx employees delivered 186 packages overnight to 25 U. S. cities. In those early years, FedEx, then known as Federal Express Corporation, experienced severe losses, and Smith was nearly ousted from his chair position. By 1976, FedEx finally saw a modest profit of $3. 6 million on an average daily volume of 19,000 packages. Through the rest of the 1970s, FedEx continued to grow, and in 1981, FedEx generated more revenue than any other U.S. air-delivery company. By 1981, competition in the industry had started to rise. Emery Air Freight began to imitate FedEx’s hub system and to acquire airplanes, and UPS began to move into the overnightair market. The U. S. Postal Service (USPS) positioned its overnight letter at half the price of FedEx’s, but quality problems and FedEx’s “absolutely positively overnight” ad campaign quelled that potential threat. In 1983, FedEx reached $1 billion in revenues and seemed poised to own the market for express delivery.

During the 1990s, FedEx proved itself as an operational leader, even receiving the prestigious Malcolm Baldrige National Quality Award from the President of the United States. FedEx was the first company ever to win in the service category. Part of this success could be attributed to deregulation and to operational strategy, but credit could also be given to FedEx’s philosophy of “People-Service-Profit,” a slogan that reflected its emphasis on customer focus, total quality management, and employee participation.

Extensive attitude surveying, a promotefrom-within policy, effective grievance procedures that sometimes resulted in a chat with Smith himself, and an emphasis on personal responsibility and initiative not only earned FedEx a reputation as a great place to work, but also helped to keep the firm largely free of unions. By the end of 2005, FedEx had $20,404 million in assets and net income of $1,449 million on revenue of $29,363 million. The company delivered to 220 countries through an infrastructure consisting of 260,000 employees, 51,500 drop-off locations, 677 aircraft, and 70,000 vehicles and trailers.

The company planned to expand its Indianapolis air hub by more than 30% by 2008. FedEx’s Kinko’s division was the leading provider of document solutions with 1,400 locations in 11 countries. Exhibit 1 provides FedEx’s financial and analytical ratios. United Parcel Service of America, Inc. Founded in 1907, UPS was the largest package-delivery company in the world. Consolidated parcel delivery, both on the ground and through the air, was the company’s primary business, although increasingly the company offered more specialized transportation and logistics services.

UPS had its roots in Seattle, Washington, where 19-year-old Jim Casey started a bicycle-messenger service called American Messenger Company. After merging with a rival firm, Motorcycle Delivery Company, the company focused on department-store deliveries, and that remained true until the 1940s. Renamed United Parcel Service of America, UPS started an air-delivery service in 1929 by putting packages on commercial passenger planes. The company entered its strongest period of growth during the post–World War II economic boom; by 1975, it-4- UV2561 had reached a milestone when it could promise package delivery to every address in the continental United States. The key to the success of UPS, later headquartered in Atlanta, Georgia, was efficiency. According to BusinessWeek, “Every route is timed down to the traffic light. Each vehicle was engineered to exacting specifications. And the drivers … endure a daily routine calibrated down to the minute. ”4 But this demand for machinelike precision met with resistance by UPS’s heavily unionized labor force.

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