6/10/2009
By David Urani, Analyst

FedEx (FDX) has publicly begun a multimillion dollar advertising hailstorm over a pending law that it says gives its competitor UPS (UPS) an unfair advantage. On June 8, it launched its website, BrownBailout.com, and reportedly plans radio and television spots as last ditch efforts to prevent the bill from being signed into law.  The law contains a provision that would move FedEx's drivers from the purview of the Railway Labor Act, and add them to the jurisdiction of the National Labor Relations Act. Under its current rules, the labor force of FedEx is limited by rules put in place for airline pilots that prevent unionization to a large degree, and applies to the company's drivers. In contrast, UPS' drivers are highly organized by the Teamsters union and receive full union backing. The new law would put FedEx under the same umbrella as UPS.

All in all, FedEx's ad campaign is sour grapes and doesn't tell the whole story to the viewer so don't believe everything they say when you see their ads. Simply put, the legislation will put FedEx and UPS on the same playing field, as they should be. Why should a UPS driver be allowed to unionize and a FedEx driver not? In fact, FedEx's corporate structure is seemingly laid out to avoid unions, as it contracts its drivers rather than making them direct employees, allowing the company to slip through a loophole.  To be honest, maybe the best way would be to remove the labor laws completely for both companies and create a free market and truly even playing field, but that's another argument, and let's be realistic, that's just not going to happen.

Now concerning FedEx, we would be worried if the bill manages to pass, because UPS currently has a leg up on profitability, despite its more stringent labor laws. UPS currently pays its drivers approximately $50,000 to $60,000 per year, including benefits while FedEx provides a comparable salary, but with minimal benefits and its drivers pay for their own fuel and maintenance costs. In the most recently completed quarter, UPS' compensation expenses as a percentage of revenue were 58%, while FedEx's were just 42%. However, UPS' astute operating efficiency elsewhere in the company led to an operating margin of 10.8% versus FedEx's 2.2%. Although to be fair, FedEx's greater exposure to next day air services has been hurting it recently, seeing as these services are more expensive and demand is falling faster compared to ground. Otherwise, FedEx has demonstrated stronger profitability in more regular economic times, which one could chalk up at least partially to employee costs implemented by the Teamsters.

The Senate has some incentive not to pass the bill, particularly since it would risk triggering wildcat strikes leading to stalled shipments. These days FedEx ships a variety of important time-sensitive goods like organ transplants, for example, that are highly relied upon. However, we have an inkling that the Senate is more inclined to side with the Teamsters, especially given the vast democratic majority and recent gripes about corporate compensation nationwide (not to mention the stake the UAW got in Chrysler and General Motors). Nevertheless, FedEx is determined not to go down without a fight. In fact, the company has gone so far as to threaten that it may not purchase several Boeing 777 aircraft it has on order, which could cost the jobs of several workers at Boeing, General Electric and other companies.

We currently favor UPS as an investment between the two, as its operating margin, driven by its larger exposure to ground services, has been more resilient during these tough economic times; this bill might prove to be another big win for UPS. On the other hand, the American consumer may be the loser here in the event that rising input costs raise shipping rates for everybody. Nevertheless, we encourage FedEx to stop whining. They have already had an advantage for years while UPS has had to sit and watch.

David Urani
Wall Street Strategies

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