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FedEx Corporation (FDX), United Parcel Service, Inc. (UPS) & Expeditors International of Washington (EXPD): Should You Invest in These 3 Air Freight Companies?

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With recovery in the U.S. economy, shipment volumes at freight companies is surging. According to an IATA report, freight volumes are expected to grow 5% per year until 2014, as international trade is likely to grow by 6% annually for the same period. Growth in the freight industry will significantly depend upon Asian countries, as it is estimated that the highest volume of growth — 12% per year — will be seen in this region. Additionally, China will account for one-third of total shipment volumes in 2014. The international freight market will be led by the U.S., as it will contribute around 8.8 million tons in 2014.

Looking at the growth of this industry, I have selected three companies which will dominate the global market by expanding their footprints, use the latest technology, and focus on e-commerce.

Profit improvement plan

FedEx Corporation (NYSE:FDX)

FedEx Corporation (NYSE:FDX) aims to improve its profits to $1.7 billion by the end of 2016. As a part of this improvement, the company will initiate a plan to update its IT structure and operations. It will result in improvement of its transaction processes and back office operations. This plan will be fully implemented by 2015, and profitability of the company is expected to improve by $500 million in 2016.

Also, to meet targeted profit, FedEx Corporation (NYSE:FDX) recently kicked off a voluntary buyout plan for its employees. This plan will be implemented in three phases, and will save around $350 million until the end of 2015.

The United States Postal Service, or USPS, recently renewed its seven year contract with FedEx Corporation (NYSE:FDX) for $10.5 billion. In the previous contract, FedEx was generating revenue of $1.6 billion per year. Before the renewal, it was expected that FedEx would lose the contract to close competitor United Parcel Service, Inc. (NYSE:UPS). However, FedEx Corporation (NYSE:FDX) won the contract due to a lower price bid. This contract accounts for 3.6% of total company revenue in the current fiscal year.

Betting on e-commerce

The U.S. economy is expected to grow by 2.5% in 2013. As a result, shipment package volumes are expected to grow as well. United Parcel Service, Inc. (NYSE:UPS)’ domestic segment saw a daily volume growth of 4.4%, quarter over quarter, in the first quarter of 2013. This segment contributes 62% to the overall revenue of the company. The main reason behind this is the increasing “business to consumer”, or B2C, shipments. B2C shipments now contribute around 40% of the overall revenue in the domestic segment of United Parcel Service, Inc. (NYSE:UPS).

Sales from e-commerce are anticipated to increase to $259 billion in first quarter of 2013, an increase of 14.8% year over year. To capture more of the e-commerce market, UPS launched a tracking system a few years back, “On-Road Integrated Optimization and Navigation”, or ORION. To cater to the B2C market, ORION employs advanced algorithms to determine the optimal route for each delivery, while meeting service commitments and reducing mile-delivery-costs. Currently, United Parcel Service, Inc. (NYSE:UPS) is using ORION in around 40 locations in the U.S., and is expecting to increase its use in other locations too.

Focusing on the domestic market to tap e-commerce with its tracking system, its total revenue is expected to surge from $23.1 billion in 2012 to $26.5 billion by fiscal year 2015.

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