slowing American economy, high fuel prices, too much capacity and slackening demand may collectively account for why UPS's first quarter results and FedEx's fiscal third-quarter earnings were relatively flat, particularly in the domestic business.

"The first quarter of 2007 has turned out to be a bust" for UPS and much of the air freight business, said Ned Laird, president of the Seattle-based Air Cargo Management Group. "There is no growth in the domestic market and virtually no growth in the to-and-from U.S. markets."

But the reports also suggest UPS and FedEx are riding out what some believe are fundamental changes in their domestic businesses by spreading into other areas, including growing international air business, that is keeping them solidly profitable.

"Both companies are doing extremely well in a very difficult environment," said Lee Clair, a partner with Norbridge, management consultants for the transportation industry. "They are also well positioned against a slowing economy because of international businesses."

Atlanta-based UPS' first quarter net profit dropped 13.5 percent to $843 million compared to $975 million the company earned in the first three months of 2006 and came on a 3.3 percent gain in revenue, to $11.9 billion.

Overall domestic package volume slipped 0.2 percent, with ground parcel business down slightly. But premium overnight air express revenue fell 1.8 percent and deferred air revenue was off 3.5 percent as yield in the air express business softened. Volume in the domestic air business was down 1.1 percent from last year.

International package revenue grew 10.4 percent, but margins fell. The $375 million operating profit, before adjustments for special charges, was 6.1 percent below last year.

The Supply Chain and Freight business posted a $46 million operating profit after losing $25 million in the year earlier quarter.

Memphis Blue

For UPS and others, the slipping volume was just one sign that a long-vibrant American economy was at least taking a break at the start of the year.

"The economy is a little bit weaker than people thought going into the first quarter," UPS Vice Chairman and Chief Financial Officer Scott Davis said during in a conference call to investors following release of the earnings, "and I suspect it will stay at that level for a quarter or two."

In earlier remarks, Davis said the softness in the market would be offset by "continued rapid growth outside the United States and steady improvements from its Supply Chain and Freight segments, [which] are expected to produce a solid performance for the company in 2007."

FedEx revenue was up 7 percent to $8.6 billion for the quarter ended Feb. 28, but the $420 million net profit was down 2 percent from the year earlier period.

Overall domestic package volume dipped 1.6 percent. And International Priority volume dipped 1 percent.

"The U.S. economy grew at a lower rate than we expected in the third quarter," said Frederick W. Smith, chairman and chief executive officer. "However, this represents a healthy transition for the economy as it phases into a more sustainable growth rate."

Despite the different operating philosophies of FedEx and UPS, "they seem to be performing almost at the same level in their express operations," said Satish Jindel, president of SJ Consulting Group. With UPS ground traffic showing no volume gains while FedEx Ground had a net gain of 272,000 packages a day, a 9 percent increase, it appeared FedEx showed a slight gain in market share, probably coming from UPS, said Jindel.

For the carriers, said Jindel, is that there appears to be little pricing pressures on either UPS or FedEx. The pricing appears relatively stable despite DHL's push to reclaim a share of the market it had lost in the past year, suggesting DHL is not discounting heavily to get back some of that business. The soft yields, however, suggest UPS and FedEx are not getting nearly the rate increases they expected this year, particularly the aggressive 4.9 percent price hike UPS announced.

But the revenue at both companies is spreading across more lines of businesses, limiting the importance of rate fluctuations in any one area. Both FedEx and UPS are adding industrial less-than-truckload operations, for instance, to get some of the very business that is luring shippers away from pricier domestic parcel services. Both integrators hope the end result will be greater product control across the transport supply chain, and that could positively affect future quarterly revenue.

Although earnings of both companies can be viewed as examples of global economic activity, Norbridge's Clair cautioned against using the quarterly results as an economic bellwether.

"Neither FedEx or UPS should be looked as examples of economic change," said Clair, because both are on the top tier of the freight business. Tracking the revenue of maritime, railroad and truck freight transportation companies is a better leading indicator because they ship raw materials for housing as well as finished products and, as such, have a far greater across-the-board impact on the economy.

That's unless, of course, the express carriers want to get into those other lines of transportation.

Kitty Loses

Cargo airline Kitty Hawk is shaking up its leadership as the airline struggles through increasingly troubling changes in its domestic air freight market.

Mel Keating, a member of the board of directors for a little more than a year, took over as chairman of the Dallas-based airline last month as Robert W. Zoller resigned as president and CEO and Gerald Gitner resigned as chairman.

Zoller remains on the board and as a consultant to the carrier. But three other members of the board resigned, signaling what may be bigger changes at the airline.

That came as Dallas-based airline reported a $11.7 million loss in the first quarter, 33 percent worse than the year-earlier quarter, led largely by a 20.8 percent decline in expedited air freight revenue fell 20.8 percent. Although overall revenue grew 4.7 percent because of growth in ground service, the pure air revenue dropped from $37 million in last year's first quarter to $29.4 million.

Trucking revenue, bolstered by last year's acquisition of Air Container Transport, more than tripled in the first quarter, but it still was only $9.1 million and transportation expenses also soared as Kitty Hawk was pressed to match pricing to the service demands of a far-flung trucking network.

Charter Lanes

ABX Air is hoping its lease agreement for two 767-200 freighters with All Nippon Airways is the start of something far bigger in the charter and leading market.

The cargo airline's charter revenue soared 83 percent in the first quarter, but that still added up to just $7 million. The overall revenue of $288.1 million was off more than 20 percent because of reduced business with its major customer, DHL.

That helped slice the net profit nearly in half, from $8.1 million to $4.2 million.

ABX is pushing in different directions, adding more adding more converted widebody 767s and pinning its future on a mix of DHL business in the United States and charter and leasing operations in the international arena.

"Our business is better positioned for growth as an independent provider of air cargo services than it was a year ago, and our new agreement with All Nippon Airways launches us into new global markets," said ABX President and CEO Joe Hete.

Hete says the ANA pact will bring $22 million in revenue this year "and will provide us with the momentum to expand into the fast-growing Asian cargo markets."

ABX started the year with four twin-engine 767s but has added three since then and will have 13 by 2008.

… Briefly

Cargo traffic for U.S. airlines fell for the first time in nearly two years in March, sliding 2.1 percent on an accelerating decline in domestic business, according to the Air Transport Association. The 3.5 percent decline in domestic traffic in March was the worst monthly showing in that business since July 2005 and left overall traffic for the first quarter flat. ... Private equity concern Oak Hill Capital Partners ordered six 777 freighters valued at around $1.4 billion, bringing o 71 the number of 777 freighters ordered by 10 customers since May 2005. … Forwarders Schenker and Kuehne + Nagel jointly signed an agreement with Cargolux for twice-weekly 747-400 freighter service between Luxembourg and Atlanta, a new destination for Europe's largest all-cargo carrier. … Cargo traffic at San Francisco International Airport plunged 13.3 percent in March, including a 16.6 percent drop in international imports. ... Domestic mail fell 43.4 percent. ... FedEx Ground is building a $5 million, 44,656-square-foot sorting facility in Columbus, Ga., to be completed this August. … Boeing named Crane Aerospace & Electronics to supply the onboard weight and balance system, named AirWeighs, for the 777 freighter. … W.S. Wilson signed a long-term agreement with Boeing to maintain an inventory of spare parts, as part of the planemaker's Integrated Materials Management spare parts reducing initiative.