It’s a heavyweight bout worthy of Joe Frazier and Muhammad Ali — the bigger, stronger United Parcel Service (NYSE:UPS) versus the quicker, more agile FedEx (NYSE:FDX). And the prize for this Fight of the (21st) Century is nothing less than the shipping and logistics championship of the world.
The biggest round in the duopoly’s post-recession battle for dominance went to UPS last week as the company announced plans to acquire struggling Dutch delivery and logistics company TNT Express for $6.8 billion. Europe’s second-largest express shipper has been hit hard by the sluggish economies in Europe and lost $229 million in its most recent quarter alone.
FedEx was rumored to be a TNT suitor, but it would have had to incur a lot of debt to get the deal done, making such an acquisition less attractive.
The deal, which still must clear significant regulatory hurdles, will give UPS/TNT a combined 25% to 30% of Europe’s small-package delivery market — about the same share as the current leader, Germany-based Deutsche Post’s DHL.
Perhaps of greater consequence, UPS will gain better access to the Middle East, Australia and Brazil and will benefit from TNT’s rail network in Europe, its road networks in China and Southeast Asia and a new regional hub that opened in Hong Kong last week.
The timing could hardly have been worse for FedEx, which reported third-quarter earnings last Thursday. The company reported earnings of $1.55 a share — 20 cents higher than analysts expected and nearly double the 81-cent EPS for the same quarter last year.
But those results, driven by a strong holiday season, were nearly eclipsed by the UPS-TNT deal and news that FDX will revise fourth-quarter and full-year earnings forecasts downward because of high fuel prices and weaker-than-expected global economic growth. Investors punished the company’s stock, which fell 3.5% on Thursday.
In FedEx’s conference call with analysts on Thursday, Chairman and CEO Fred Smith declined to comment directly on the UPS-TNT deal, noting instead that his company plans to expand its presence in Europe “organically” rather than via acquisitions.
Still, he believes Europe will be a comparatively softer shipping market in the near term. “The growth rates in Europe are extremely low, and my personal belief is they’re going to continue to be low as long as the policies being pursued in Europe are the same as the policies that have been pursued over the last 20, 25 years,” he said.
Smith also pointed out that Europe is a far more “fractionated” market than is the U.S., broken up into domestic, pan-European and intercontinental segments, the last of which FedEx considers a competitive edge.
That’s because a lot of those intercontinental deliveries are to and from Asia, the world’s hottest airfreight market. To better serve that market, FDX is making a big investment in Boeing (NYSE:BA) 767 aircraft, which will be 30% more fuel-efficient than existing MD-10s.
And while growth rates have cooled in the region — particularly in China — company executives believe fourth-quarter results will get a bump. “We actually have been outperforming the marketplace in Asia-Pacific for many quarters now,” FedEx Express President and CEO David Bronczek told analysts. “I would say there is an overall modest increase in demand for our services in Asia-Pacific right now.”
The bottom line: Last November, I pointed out that UPS’ biggest opportunity would be cashing in on global supply-chain growth through the acquisition of TNT.
This deal — combined with FDX’s organic growth and Asia-focused strategy — signals a new round in the slugfest between these two heavyweights.
UPS is a little like former heavyweight boxing champ Joe Frazier: big, powerful and relentless in a quest for total domination. UPS is much bigger than FDX, delivering some 15 million packages a day. Its logistics and supply-chain-management operations help it rule the freight sector. And in the wake of the TNT deal, UPS’ competitive position for time-sensitive shipments in Europe suddenly packs a much bigger punch.
But like Muhammad Ali, FedEx “floats like a butterfly and stings like a bee.” FDX is a fast, agile competitor, and CEO Fred Smith is a born innovator. The company has been able to respond quickly to market shifts away from premium services to more economical deliveries, and its freight segment has been a winner in that regard. The company’s big investment in greener planes and delivery vehicles will help it control the transportation sector’s biggest challenge: high fuel prices.
UPS’ TNT acquisition is by no means a knockout punch — Europe is a far more fragmented market than is the U.S., and European economies will be stuck in the doldrums for a while. And count on DHL to howl in protest to EU regulators, though the odds strongly favor the deal being approved.
Europe will rebound within the next couple of years, and TNT will help UPS maximize the big investment in its Cologne air hub.
FedEx will gain ground in Asia, but TNT’s Hong Kong regional hub will be an important asset for UPS as China rebounds. At the end of the day, FDX is trying to put a good face on a challenging development. “The winner and still heavyweight champion of the world” is UPS.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.