Prepared for APWU by:

Workplace Economics, Inc.

Washington, D.C. 20033-0367

202/223-9191

January 27, 2002

UPS and FedEx are two major courier service providers that are each marked by a broad and increasing global presence. Although the courier service industry is sometimes characterized as dealing primarily with express shipments of documents, in fact, most large multinational courier service enterprises provide a wide range of document, small package and freight transport services. As a consequence, the range of cargo handled and transported by these companies is probably greater than that typically handled by many government postal services. At the same time, such firms provide significant related logistical services to their customers and, further, even provide military passenger air transport services to the U.S. government. All these activities have spurred UPS and Fedex to acquire and operate substantial air transportation and highway transportation equipment and to spend proportionately greater amounts on transportation and fuel than expended by the U.S. Postal Service. Yet, courier service firms may be distinguished from traditional cargo or freight transportation companies by their emphasis on providing primarily time-definite services for moving packages and freight that typically does not consist of large bulk shipments of agricultural products, natural resources or finished manufactured goods.

The results shown in Table 1 should not be surprising, given the relatively strong investment in air and ground transportation equipment and infrastructure (e.g., airport landing rights, etc.) made by UPS and Fedex as compared to the U.S. Postal Service.

A salient development in recent years has been the growth of the role of "integrators" such as UPS and Fedex in the movement of air cargo. These companies offer one-stop shopping to their customers by integrating services previously offered by a combination of air cargo carriers and freight forwarding companies. Focusing attention on domestic and international express shipments, these integrators have grown substantially relative to traditional air cargo operations. Integrators, such as UPS, FedEx, TNT, DHL and others have come to dominate the international express portion of the air cargo market. At the same time, the importance of express freight transport in the global economy has grown in response to:

1. changes in business customer manufacturing and/or distribution approaches in an effort to reduce inventory costs (e.g. "just-in-time" manufacturing) and to adapt to the "global marketplace";

2. changes in business customer and residential customer views on document transmittal in a time-sensitive, quality assured (by document tracking) manner;

3. large scale, intensive marketing campaigns to induce demand for quicker and/or time-sensitive package and document services;

4. improvements in available technology (such as sophisticated computer systems to mark, track, bill and otherwise process packages) which facilitates time-sensitive, reliable delivery and makes it more widely available at a relatively cheaper price;

5. deregulation or liberalization of postal regulations permitting private companies to enter previously protected postal markets, especially high-margin, time-sensitive package delivery;

6. gradual changes in business organizations opening the door to the contracting out of distribution functions to fully integrated freight transportation companies;

7. availability of used and new commercial aircraft at relatively reasonable prices due to excess capacity among passenger carriers, particularly after airline deregulation, in the United States; and

8. increasing liberalization of bilateral treaties governing air transportation routes between different countries and continents.

Another significant recent development is that business organizations have sought to simplify their distribution function worldwide by using only a few delivery modes and, more recently, have taken this notion to its logical conclusion by contracting out their entire distribution function to fully integrated transportation companies. This development is reflected in the growing "logistics" portion of the integrators' business.

For a long time, commercial airlines, known primarily for carrying passengers, have also been major freight carriers world-wide -- in some cases rivaling or surpassing all-cargo carriers in tonnage carried. For example, among airlines known for passenger service, large amounts of freight are carried by such airlines as Northwest, KLM, Lufthansa, Air France, American Airlines and British Airways. Such freight may be carried in the bellies of passenger planes or by dedicated freighter aircraft operated by passenger airlines. With the global expansion of such courier service and cargo service carriers as FedEx and UPS which can offer a more integrated delivery service to customers, the commercial passenger carriers can no longer take their cargo transport revenues for granted. Thus, while the courier service industry is often seen as presenting a challenge to the postal-communications industry, another dimension to the courier service industry is its challenge to traditional airline cargo carriers.

Pressure has been building for increased liberalization in the system of bi-lateral treaties between governments which govern both air traffic and cargo traffic, even when the latter is carried by all-cargo airlines. Large integrators, not surprisingly, have been in the forefront seeking changes to current bi-laterals, in order to facilitate the expansion of their delivery networks worldwide. For example, both FedEx and UPS have been aggressive in pushing for greater route authority and airport access. This means that the large, dominant multinational courier enterprises are given greater access to international markets and an enhanced ability to bring more aircraft capacity into such markets.

The bottom line of all these trends has been to encourage the acquisition of greater air transport capacity by Fedex and UPS. By contrast, the U.S. Postal Service has not been involved in making itself over as an integrator in the same way and, consequently, has not invested in the same fashion by operating its own air transportation equipment. Indeed, the transportation agreement reached by the U.S. Postal Service in August, 2000 with Fedex resulted in the Postal Service relying on Fedex air transport equipment to move "significant portions of Express Mail, Priority Mail, and First-Class Mail" (See USPS 2001 Comprehensive Statement on Postal Operations at p.25).

The dimensions of the UPS and Fedex air transport operations can be gauged by a review of the size of their respective fleets. The air transportation fleets operated by UPS and Fedex are substantial. UPS owned or leased (capitalized leases) 253 large transport aircraft (B727-100 or larger airlift capacity) and utilized an additional (usually smaller) 346 aircraft on a chartered or short-term lease basis in the year ended December 31, 2001. At that time, UPS also had firm commitments to purchase an additional ten Boeing MD-11 aircraft and 72 Airbus A300-600 aircraft by 2009 and options to purchase an additional 22 Boeing MD-11 aircraft and 50 Airbus A300-600 aircraft between 2004 and 2010. Fedex’s fleet as of May 31, 2002 consisted of 347 large transport aircraft (B727-100 or larger airlift capacity) and 301 smaller aircraft – with 509 aircraft owned by Fedex and the remainder operated under lease. In addition, Fedex had firm commitments to purchase eight DC10s, three MD11s, seven A300s and three A310s to be delivered through 2006 and ten Airbus A380-800F aircraft ( a new high-capacity, long-range aircraft) to be delivered during the period 2008 – 2011, with options for ten additional A380-800F aircraft. (See UPS 2001 10-K and Fedex 2002 10-K.) The large transport aircraft operated by both companies are operated and maintained by company employees (pilots and mechanics). By contrast, the U.S. Postal Service makes no similar aircraft investments.

While differences in transportation expenditures have been highlighted in this paper as a means of showing how labor costs as a percentage of total operating costs for UPS and Fedex as compared to the U.S. Postal Service cannot be meaningfully calculated without adjustments that take into account major operating differences between these organizations, adjustments for transportation cost differences do not exhaust the range of operating differences between these entities. For example, while the Postal Service spent $148 million on advertising in FY01 in generating $65.8 billion in revenues, Fedex spent $226 million on advertising in generating $20.6 billion in revenues. A detailed review of accounts at a finer level of detail than currently available in general annual reports no doubt would provide quantifiable examples of other operating differences.

Operating differences are also reflected in the assets purchased by these organizations. For example, nearly 77% of the value of assets at cost (or $13.5 billion) posted on the Fedex balance sheet is accounted for by equipment (aircraft and related equipment, package handling and ground support equipment and vehicles, and computer and electronic equipment). Similarly, some 78% of the value of assets at cost (or $18.8 billion) posted on the FY01 UPS balance sheet is accounted for by equipment (aircraft, vehicles and plant equipment). By comparison, equipment accounts for only 41% of the value of assets at cost (or $16.4 billion in FY02 and $15.4 billion in FY01) on the U.S. Postal Service balance sheet. Buildings, land and leasehold improvements account for the majority of Postal Service assets. (See 2002 Fedex 10-K, 2001 UPS 10-K and 2002 Annual Report of the U.S. Postal Service.)

Finally, not all products and services offered by the U.S. Postal Service are similar to those services offered by UPS and Fedex. A review of the duties of a postal window clerk provides examples of many services obtained by the public at postal facilities that are not available at the other organizations in question. Similarly the nature of what is delivered by the Postal Service to and for its customers, especially in the case of first class mail (used to facilitate transactions and correspondence) and periodicals (used for publications), is distinguishable in significant part, from the nature of deliveries made by UPS and Fedex.

In short, a large part of the apparent differences between UPS and Fedex labor costs as a percent of total operating costs on the one hand as compared to the same ratio for the U.S. Postal Service are readily explained by differences in the nature of the operations of each of the three respective organizations. Adjusting for just one of these major differences – transportation related expenditures – substantially narrows the differences in the ratio between the three organizations.

2 Such adjustments are limited to the nonlabor costs of operating transportation equipment. While not done in the adjustment undertaken in this paper, pilot and aircraft mechanic wages could also arguably be extracted as part of the adjustment inasmuch as the Postal Service does not directly employ such categories of labor.

3 Table 1 shows that between FY01 and FY02, Fedex’s labor costs as a percent of adjusted operating expenses increased from 71% to 76%. Interestingly, management’s discussion of Fedex’s 2002 operating results (Fedex 10-K at p. 44) indicates that for 2002, wages and benefits were higher "partially because a significant portion of incremental cost increases related to the USPS contract is reflected in salaries and wages" (See 2002 Fedex 10-K at p.44.)

4 The assumption of 260 operating days per year or 5 days per week is conservative; if a greater number of operating days is actually achieved then average operating mileage would be even lower than 21 miles per day.