Executive Summary Background: FedEx and United Parcel Service, Inc. are the two largest competitors in the world’s package delivery service industry. UPS, founded in 1907, was the largest package delivery company in the world. By 2003, UPS delivered throughout the United States and to more than 200 other countries, transporting over 13 million packages a day. FedEx, created in 1971 by Fred Smith, grew successful because of its innovative approach to purchase its own planes rather than delivering packages on the space available below commercial flights. By the end of 2003, FedEx shipped more than 5.4 million packages a day all over the world. Situation: Both FedEx and UPS continued to expand its reach overseas. According to many, China presented enormous opportunity for both companies as their economy was predicted to become the world’s second largest within 11 years and the largest by 2039. In addition, the overall market for air transportation cargo in China had been growing consistently at around 30% every year, and was expected to continue that trend for at least the next five years. And lastly, Inter-Asia trade was projected to grow at a rate of 16. 8% annually through 2005.
On June 18, 2004 the United States and China reached an agreement to significantly expand air transportation between the two countries. This arrangement, the largest of its kind in history, increased the amount of cargo trading flights by approximately five times. It made over 100 new weekly flights up for grabs, and also allowed for an additional 195 weekly flights for each country; 111 by all-cargo carriers and 84 by passenger airlines. In addition, this agreement allowed for the establishment of air-cargo hubs in China and landing rights for commercial airlines at any airport.
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With FedEx and UPS primed to be the main beneficiaries of this new agreement, the question was which company, financially and qualitatively was better prepared to take advantage of this emerging market overseas? Solution: We believe that UPS exhibits a much greater chance to succeed in China’s emerging market. From a financing perspective, UPS generates a higher cash ratio, current ratio, defensive interval, times-interest-earned ratio, fixed-charge ratio, ROE, and liquidity ratio. In addition, UPS has a higher EVA and is able to create more value through the capital it employs while FedEx has consistently returned negative EVA results.
Both companies have positive MVA, however UPS’ has always been significantly higher and as of 1998 has been over six times that of FedEx. UPS has also demonstrated that it is more adept to be successful internationally when it significantly outperformed FedEx in Europe and plans to continue to do so. An analysis of growth in revenue generated internationally and identifiable assets also indicates that UPS is the stronger carrier in international markets, complementing the two companies’ history in Europe. Based on our research, UPS will gain control over the market in China over FedEx.
Analysis: From Figure 1 it is clear that UPS has a significantly higher cash ratio and current ratio while FedEx’s cash and current ratios are worryingly low. Notably, UPS’ defensive interval is consistently far higher than that of FedEx. These ratios, combined with UPS’s much higher times-interest-earned figure indicate that UPS is in a much less risky position from a financing perspective. Another important contrast in the two firms’ ratios is the fixed-charge coverage ratio which is a ratio that indicates a firm’s ability to satisfy fixed financing expenses.
As seen in Figure 1, the fixed-charge coverage ratio of FedEx is below one which raises concern since failure to meet fixed financing expenses can result in higher cost of capital and even default. This ratio comparison indicates that UPS has much better financing prospects for an expansion into China while maintaining a much higher safety margin if operations are not successful. Even with UPS’ financially conservative position, the firm has managed to generate higher profit margin and ROE than FedEx as depicted in the DuPont Analysis in Figure 1.
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Finally, UPS’ superior liquidity position, and much higher level of retained earnings gives UPS the key advantage of having the ability to respond quickly to new opportunities in this emerging market. In this section we compared FedEx’s and UPS’ annual Economic Value Added (EVA) and Market Value Added (MVA) figures from 1992-2003 in order to glean some insight on how well the companies create value through the capital they employ. Shown in Figure 2 and Chart 1, it is apparent that UPS has a higher EVA and is able to create more value through the capital it employs.
In fact, UPS has been generating an EVA of billions of dollars over the last five years while FedEx’s EVA has been consistently negative and falling every year. Next we compared the companies MVA’s, which is basically a cumulative EVA and represents the present value of all future EVA’s. In Figure 2 and Chart 2, we can see that both companies have had positive MVA figures over the last 12 years but that UPS’ has always been significantly higher and as of 1998 has been over six times that of FedEx. UPS proved to be stronger in the international market when both UPS and FedEx broke ground in Europe.
Despite the company’s heavy investments and efforts in the European market, FedEx lost an estimated $1 billion between 1984 and 1992. After 1992, the company was forced to rely on the assistance of local partners for delivery. UPS, on the other hand, broke into the European market in 1988 and found success by implementing innovative technology systems. After a successful entry into Europe, UPS announced plans to invest another $1 billion in its European operations during the next 5 years. The success UPS has had in Europe leads to the conclusion that UPS will continue to succeed with its expansion in China.
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An analysis of growth in revenue and identifiable assets also indicates that UPS is the stronger carrier in international markets, complementing the two companies’ history in Europe. As seen in Figure 3, UPS has achieved far higher average growth in international revenues over the past 12 years as compared to FedEx (13. 26% and 7. 73%, respectively).
Furthermore, UPS has experienced far higher average growth in identifiable assets in international markets over the past 12 years as compared to FedEx (11. 92% and 1. 58%, respectively).
FedEx has managed to achieve higher consolidated average growth in revenue and identifiable assets over the past 12 years; this, however, is a result of stronger domestic performance, not a result of stronger international performance. UPS has proven to be more adaptable and successful in foreign markets. Based on the history of the companies’ international achievements, we believe UPS will be more successful in China. Adding to the quantitative support provided, Figure 4 compares the qualitative advantages of each company, also supporting UPS’ superior position in international markets. Appendix: