Fedex

THE BATTLE FOR VALUE, 2004: FEDEX CORP.

VS. UNITED PARCEL SERVICE, INC.

FedEx will produce superior financial returns for

shareowners by providing high value-added supply

chain, transportation, business, and related information

services through focused operating companies

competing collectively, and managed collaboratively,

under the respected FedEx brand.

вЂ"FedEx mission statement (excerpt)

We serve the evolving distribution, logistics, and

commerce needs of our customers worldwide,

offering excellence and value in all we do. We

sustain a financially strong company, with broad

employee ownership, that provides a long-term

competitive return to our shareowners.

вЂ"UPS mission statement (excerpt)

On June 18, 2004, the United States and China reached a landmark air-transportation

agreement that quintupled the number of commercial cargo flights between the two countries.

The agreement also allowed for the establishment of air-cargo hubs in China and landing rights

for commercial airlines at any available airport. The pact represented the most dramatic

liberalization of air traffic in the history of the two nations, and FedEx Corporation and United

Parcel Service, Inc. (UPS), the only U.S. all-cargo carriers then permitted to serve the vast

Chinese market,1 were certain to be the primary beneficiaries of this opportunity.

News of the transportation agreement did not come as a major surprise to most observers

as U.S. and Chinese negotiators had been in talks since at least February. The stock prices of

both companies had been rising steadily since those talks began, but FedEx’s share price had

rocketed at a rate nearly five times faster than UPS’s.2 Exhibit 1 presents an illustration of recent

stock-price patterns for the two firms relative to the S&P 500 Index. FedEx had the largest

foreign presence in China, with 11 weekly flightsвЂ"almost twice as many as UPS. The company

served 220 Chinese cities, and flew directly to Beijing, Shenzhen, and Shanghai. FedEx’s

volumes in China had grown by more than 50% between 2003 and 2004.

1 Northwest Airlines served China through both all-cargo and all-passenger services.

2 Between February 18 and June 18, 2004, FedEx’s stock price rose 13.9%, whereas UPS’s grew 3.1%.

UV0095

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While UPS lagged behind FedEx in the Chinese market, it was still the world’s largest

package-delivery company and the dominant parcel carrier in the United States. UPS had been

active in China since 1988 and was the first carrier in the industry to offer nonstop service from

the United States. By 2003, UPS had six weekly Boeing 747 flights to China, with direct flights

to Beijing and Shanghai, serving nearly 200 cities. UPS reported a 60% growth in traffic on its

principal U.S.вЂ"Shanghai route since initiating that service in 2001, and it predicted that peakseason

demand would exceed its capacity.

As the U.S. package-delivery segment matured, the international marketsвЂ"and especially

ChinaвЂ"became a battleground for the two package-delivery giants. FedEx had virtually invented

customer logistical management, and was widely perceived as innovative, entrepreneurial, and

an operational leader. Historically, UPS had a reputation for being big, bureaucratic, and an

industry follower, but “Big Brown” was aggressively shedding its plodding image, as it too

became an innovator and a tenacious adversary. UPS had recently undergone a major overhaul of

its image, and was repositioning itself as a leading provider of logistics and supply-chain

management services.

The 2004 air-transportation agreement between China and the United States was a

watershed moment for the international package-delivery businessвЂ"more than 100 new weekly

all-cargo flights were up for grabs with the United States’ largest trading partner. There was,

however, no guarantee for exactly how those new cargo routes would be allocated between UPS

and FedEx, companies that had been battling each other for dominance for more than 30 years.

Moreover, the eventual assignment to the region of other carriers would test each company’s

ability to fend off emerging competitive threats.

Against this backdrop, industry observers wondered how the titanic struggle between

FedEx and UPS would develop, particularly for investors in the two firms. Was the performance

of the companies in recent years predictive of the future? Success in China was widely seen as

the litmus test for corporate survival in the new millennium. Which company was better

positioned to attract the