By Tom Costello Sr. Correspondent
updated 12/18/2003 4:39:37 PM ET 2003-12-18T21:39:37

With online shopping booming during the peak holiday season, this is expected one of the busiest seasons ever for package shippers – with some 500 million parcels expected to be delivered. For industry leaders UPS and FedEx, the season is critical for making their yearly revenue targets.

Industry wide, those revenues topped $47 billion a year, a market that the two giants attack with two very different business models.

In the air, FedEx dominates with the world's largest air-delivery service, carrying 25 percent more air shipments each day than UPS. On the ground, UPS is five times the size of FedEx, delivering 13 million packages a day. That’s more than five percent of the U.S. economic output.

There are, however, signs of a shift in momentum, according to Donald Broughton, who covers both companies for A.G. Edwards.

“There's a shifting of market share on the ground,” he said. “FedEx is gaining, UPS is losing."

And it's on the ground where the difference in business models is most evident. UPS is unionized, while FedEx works on an owner/operator model: Some 16,000 people have a direct stake in the company’s success.

"There's nothing more powerful than somebody who runs their own business and has the incentive to build up the equity in that business and the value of their franchise and their route,” said Fred Smith, FedEx founder, chairman, and CEO. “And some of them have more than one."

UPS declined to be interviewed for our report.

The shipper with the famous brown trucks offers something FedEx doesn't: 3,300 branded full-service UPS retail stores. FedEx services are available through its own, and other retail, outlets nationwide.

So might FedEx expand its own branded retail stores to compete head-on with the UPS full-service stores? Listen carefully to CEO Fred Smith:

"We have about 50,000 outlets today and we have a lot of opportunity in that sector so we'll just have to see how it plays out," he said. “It is an area we are keenly interested in, and it's a good question, and we are going to watch that very carefully."

Here's why: Smaller retail customers pay higher rates for FedEx's air express business. That lowers the yield for UPS, while improving it for FedEx.

In fact, 4 years ago, UPS made $5.50 more per delivered package than FedEx. Today, that's premium is down to $3.00. On Wednesday, FedEx posted its largest quarterly drop in net income in six years, as daily air shipments dropped and more employees took buyouts to leave the company.

International deliveries are another critical battlefront, where yields can be 4 times what they are domestically.

The companies’ financials stack up like this: UPS has annual revenues of $30 billion, while FedEx has $22 billion. But UPS has a market capitalization, or total stock market value, that's four times that of its rival: $82 billion compared to FedEx’s $22 billion. UPS trades at twice the price-to-book ratio that FedEx does. Those numbers have convinced analysts like Broughton that UPS is over-priced.

"I give the advantage to FedEx,” said Broughton. “It's more entrepreneurial, more willing to take risk. And the model it's employing should produce better operating margins for it and steal the premium yield from its competitor, UPS."

© 2011 MSNBC Interactive


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