Air Express Carriers - Law & Order In The Markets

Includes: FDX, UPS
by: Victor Cook

"Law & Order" is the most successful TV franchise of all time and one of my favorite shows. If I rewrote the opening voice-over from that series to capture the essence of Competing for Customers and Capital it would read like this:

In the private enterprise system, investors are informed by two separate yet equally important groups -- customer markets where revenue is generated and capital markets where value is created: this is only one of the stories they have to tell.

Having said this, it is important to note that there is a fundamental difference between the management of our criminal justice and our private enterprise systems:

Interactions between the police and district attorneys are coordinated. Interactions between customer and capital markets are largely ignored.

The purpose of this post is to document the interactions between customer and capital markets - the dual market performance - of international air express carriers.


In my last post on Air Express Carriers and Intangible Market Value I documented the relationship between shareholder value and competitive strategies of the top five international companies. I found that if FedEx (NYSE:FDX) had merged with TNT [AEX: TNT] in 2007 the combination would have dominated its peers in earnings productivity:

When management wrings the last drop of earnings out of each sales dollar they can do no better unless they change their business model -- or merge, which amounts to the same thing. The degree to which they achieve this goal is measured by relative earnings productivity. This is the ratio of actual earnings to maximum earnings.

The peer group in that analysis was the Swiss carrier Kuhne+Nagel [SWX: KNIN]; United Parcel Service (NYSE:UPS); and DHL [XET: DPW]. As insightful as this analysis may have been, it was missing an important dimension: the merged company's dual market performance.


Remember, investors are (or should be) informed by two separate but equally important groups - the markets for customers and capital. Capturing a company's performance in these dual markets is deceptively simple - compare its share of revenue with its share of value in a peer group.

In the first quarter of 2008 the German company was the hands-down market leader - in share of revenues [SOR]. The following chart shows that DPWN's $24,890 million in revenue made it the international customer market leader with 41.4% of the group's $60,062 million revenues. Followed by UPS with 21.1% of revenues. FDX was a distant third with a 16.4% share, just a little over two points above KNIN's 14.0%. TNT picked up the balance with a SOR of 7.1 percent.

Comparing the same companies in the same quarter on share of value [SOV] tells an entirely different story. Now UPS takes a commanding lead with a 41.1% share of group market value.

These two charts offer just a peek inside the tent of dual market information. The full measure of this information can be found by creating a new metric I call the Risk Adjusted Differential [RAD].


Measuring risk-adjusted differentials is so simple you probably will wonder why you never thought of it before. For each company:

  • Calculate a series of value and revenue shares
  • Take the difference between SOV and SOR
  • Calculate the standard deviation among the differences
  • Divide each difference by that standard deviation.

The result is a standard normal variable. Such a variable has two very useful properties: the mean is zero and standard deviation is one. The combination of these properties leads to the following control chart on the dual market performance of air express carriers.

The vertical axis in this chart is the risk-adjusted differential ranging from +16 to -16 points. The horizontal axis runs from the last quarter 2005 through the first quarter of 2006.


The green and red dashed lines at +2 and -2 represent the 95% confidence interval surrounding risk-adjusted differentials. Observed values of RAD greater than +2 or less than -2 differ significantly from the expectation [Zero]. Based on this information we can conclude that:

  • UPS is 6 to 9 standard deviations above average
  • TNT and FDX both are within expectations
  • DPWN is 10 to 12 standard deviations below average.

Will the extraordinarily high and low dual market performances of UPS and DPWN be reflected in their future stock prices? Equally important, will the average performances of FDX and TNT be strengthened if a merger were consummated? Only the future will provide definitive answers. For a review of the theory see my 13 minute narrated slide-show on Competitive Stock Valuation. Stay tuned for the next post in this unfolding saga of separate yet equally important markets.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.