updated 1/17/2005 12:20:26 PM ET 2005-01-17T17:20:26

In its advertisements, United Parcel Service always asks, “What can Brown do for you?” The more relevant question of the moment at the $33 billion logistics and delivery giant might be, “What can Brown do to keep its lead?”

Beset by aggressive competition from archrival FedEx and from DHL Worldwide Network, a unit of Germany's Deutsche Post, UPS last week surprised the markets by warning of lower-than-expected results for the fourth quarter when it reports on Jan. 27.

UPS said it expects per-share earnings of $2.89 to $2.90, down from $2.94. UPS' stock price promptly dropped $6.12 on the news.

The company blamed bad weather during the peak holiday shipping season and an “unexpected, significant drop” in package volume between Christmas and New Year's Day.

For its part, FedEx can't help but enjoy a moment of schadenfreude. It wasted no time in reassuring investors that it would meet its earnings goals for the quarter and said it had a strong holiday season.

And FedEx is only part of UPS' competitive problems. Upstart DHL, which acquired Airborne Express in 2003, has launched an all-out attack on the U.S. market in the last year, with cheeky TV ads that feature its bright yellow vans and target FedEx. But UPS, the largest U.S. carrier, has the most to lose in terms of market share.

Analyst Gregory Burns at J.P. Morgan is starting to worry about a price war. But Arthur Hatfield, analyst at Morgan Keegan, doesn't think that's much of a possibility. “DHL has certainly spent a lot of money on ads,” he says. “And they've said they're going to spend a billion or so to compete against FedEx and UPS. But I think to get the kind of network they're going to need to be on par with FedEx and UPS, they're going to have to spend a lot more than that. More like $3 billion or $5 billion.”

Hatfield says UPS' biggest problem is coming from FedEx's newer FedEx Ground service. FedEx built that service after acquiring Roadway Package System in its 1998 acquisition of the Caliber companies. It started re-branding the RPS service as FedEx Ground in 2000, and Hatfield says that's what's hurting UPS the most. “This is a very recent, real impact,” he says.

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