Ups vs Fedex Essay Example for Free

Ups vs Fedex Essay In 1975, UPS promised package delivery to every address in the United States; FedEx was not able to guarantee delivery in every area. When deregulation of the domestic airline industry and trucking industry occurred, the operating landscape changed, and FedEx became the beneficiary by expanding its delivery fleet. The just-in-time supply movement enabled FedEx to grow as well by creating a larger demand for express delivery. Technological innovations, such as its package tracker, assisted FedEx in improved customer service; UPS was able to keep pace with technological innovations of its own, such as its own package tracker. UPS’s key to success was and remains efficiency, timing all delivery routes to traffic signal patterns for example. UPS also expanded into Canada and Germany before FedEx. In recent years UPS has invested heavily in information technology, aircraft and other facilities. Competitor Comparison UPS went public in 1999, starting direct stock competition with FedEx UPSFedEx Offered package delivery services to the entire US and over 200 countries, delivered over 13 million packages and achieved profits of $3 billion, and AAA bond rating in 1983Operational leader reached $1 billion in revenues during 1983 and was poised to own the market for express delivery Restructured by becoming an aggressive company and expanding through acquisitionsNo unions Acquired Miami based carrier with operations in Latin AmericaAchieved $15 billion in assets, net income of $830 million on revenues of $22. billion in 2003 Opened Mail Boxes Etc. franchise stores, providing packing, shipping and mail service Invested in IT, aircraft and facilities to support service innovations, quality and reduce cost Became involved with all aspects of supply chain logistics to offer another service to its customers By 2003, UPS and FedEx were in very similar business positions, providing express service in the US and abroad. Express Segment: 1999 2003 UPSFedEx Focus on customer serviceFocus on customer service Started price war, but later settled on regular price increasesSettled on regular price increases Cut costs through economies of scale, investments in IT and business process reengineeringCut costs through economies of scale, investments in IT and business process reengineering IT: UPS employs on DIADs for drivers to scan package barcodes during pickupIT: COSMOS transmits data from package movements, customer pickups, invoices and deliveries to central database in Memphis, TN UPS installed drop off boxes, 165 drive through and 371 express delivery stores, Saturday pickups to expand services and match FedExPurchased ground vehicles worth $200 million to match UPS delivery fleet Offered integrated logistics service to large corporate clients with total inventory controlCompeted for large corporate clients providing integrated logistics service In the international package-delivery market, UPS exceeded and had more success and dollar investment marked for international growth than FedEx . International Package-Delivery Market European entry in 1988 with acquisition of 10 continental courier services Lost estimated $1 billion in Europe since entry in 1984 and eventually sold European hub to DHL Spent an additional $1 billion in 1995 to expand it European operationsExpanded routes in Latin America, Caribbean and introduced AsiaOne next business day service between Asia and US in 1995 Begins direct flights to China in 2001Establishes Chinese Headquarters in 2003 Contracts with Yangtze River Express for package delivery within China in 2003 FedEx owned the largest foreign presence in China, with almost double the amount of daily flights to China than UPS, serving 220 Chinese cities with direct flights to Beijing, Shenzhen and Shanghai. FedEx volumes in China grew by more than 50% between 2003 and 2004. UPS was active in China beginning in 1988, and was the first carrier to offer nonstop service from America. By 2003, UPS had 6 weekly flights to China with direct service to Beijing and Shanghai, serving about 200 cities with expected growth of about 60% on its main route. UPS also predicted peak-season demand to exceed capacity. Financial Analysis UPS appears to be the better bet for the long-term because its historical financial results are superior to and more consistent when compared to FedEx. If we consider EVA (Economic Value Added) as the key gauge for evaluating both firms, UPS is clearly the better performer. In the twelve year period of 1992 through 1993, UPS created $4. 33 billion in cumulative economic value, while FedEx destroyed $2. 25 billion. Because of its superior profitability and cash generating capabilities, UPS has better prospects for funding growth through internal and external sources. Even if we weaken the assumption of past history as a good indicator for the course of future financial performance and management, the data still indicates UPS is in a better financial position for taking on future growth. Decomposing EVA UPS outperformed FedEx on profitability in the twelve year period with an average RONA of 13. 78% compared to 8. 31% for FedEx. This profitability disparity accounts for most of the differences in their EVA histories. The twelve year average cost of capital/WACC for each firm was virtually the same (11. 97% for UPS, 11. 5% for FedEx); FedEx failed to generate enough RONA to cover its cost of capital in eleven years of the twelve year period, while UPS generated positive economic returns in seven of those years. The economic profit margin or spread between RONA and WACC for UPS averaged about 1. 8 % compared to -3. 14% for FedEx. For the last year of the period, 2003, UPS’s spread was 5. 11% and FedEx’s was 1. 10%. Given these statistics, UPS is obviously the better value creator and more profitable firm. Funding Future Growth (Cash and Debt) UPS is in a better position to fund its future growth because it generates more cash through superior profitability and its bigger size NOPAT for UPS in 2003 was at $3. 31 billion versus FedEx at $1. 42 billion. Thus, UPS can fund a larger percentage of its growth through internally generated funds. UPS can also take on additional debt at a lower cost than FedEx. The two firms have very similar debt/equity ratios but different bond ratings, with UPS rated higher. Therefore, even with similar relative debt levels, UPS can choose to supplement its funding needs with debt at a lower interest expense than FedEx. As of 2003, UPS‘s interest coverage ratio is three times that of FedEx, so UPS has a bigger cushion for handling additional debt (which partially explains UPS’s higher debt rating). In summary, from a cash perspective and in the context of each firm’s debt load, UPS is clearly in a better financial position to compete than FedEx. Operational Analysis While UPS and FedEx operate with similar business practices and offer almost identical services to their respective customers, UPS is more diversified both in operational revenue and global market service. Virtually all of FedEx’s business is derived from air-express sector in the package delivery; that segment is only 44% of UPS’s revenues. Both companies compete fiercely, often copying the other’s moves. For instance, FedEx has started to poach clients from UPS by offering volume discounts and excellent delivery services. UPS has countered by matching FedEx’s customer interaction by installing drop boxes and offering Saturday delivery to equal FedEx’s delivery schedule. Annualized capital expenditures are almost identical between the two companies for the period of 1992 to 2003 was 34. 64% for FedEx and 36. 78% for UPS. The main difference between the two is the markets each company serves and how they serve it. FedEx utilizes an independent contractor model, while UPS has unionized employees. FedEx attempted to develop its European capabilities until 1992, when it sold its operations to DHL, and now relies on local partners. By comparison, UPS acquired multiple courier services and announced in 1995 it would spend $1 billion over the next five years to continue its European expansion. The following table provides the comparison of worldwide facts between FedEx and UPS: FedExUPS Main HubMemphis, TennesseeLouisville, Kentucky Packages handled per day5. 4 million13. 6 million Air deliveries per day3. 1 million2 million Service AreaMore than 220 countries and territories, including every address in the United StatesMore than 200 countries and territories; every address in North America and Europe WorkforceMore than 216,500 employees worldwide360,000 Worldwide Delivery FleetMore than 50,000 motorized vehicles and 625 aircraft88,000 ground vehicles; 583 aircraft. In the ground package-delivery business, UPS is approximately five times larger than FedEx, delivering 11 million packages per day. However, there are signs that FedEx is gaining market share for ground delivery. FedEx dominates with the world’s largest air-delivery service, delivering 50% more per day than UPS. The battleground has shifted from Europe to China, which is projected to become the second largest economy by 2011 and the largest by 2039. Because China’s export volume increased by 101% in 2004, both companies have focused on the import/export package market valued at nearly $1 billion, instead of the intra-domestic market, valued at approximately $800 million. Although it entered the Chinese market after FedEx, UPS is aggressively expanding its services within the market. While FedEx flies almost twice as many daily routes to China than UPS, the new service agreement between the US and China will alter the landscape; it is uncertain how the newly acquired routes will be distributed to FedEx, UPS and their other competitors. Conclusion UPS will achieve better long-term performance relative to FedEx because of its bigger size, more diversified revenue and business, superior financial and operational efficiency and a better capital position.