The Dow Jones Transportation Average (DJTA), which is a price weighted index of 20 transportation stocks made up of airlines such as Delta Airlines (NYSE:DAL), railways like Norfolk Southern (NYSE:NSC) and trucking and delivery companies such as FedEx (NYSE:FDX), is up nearly 8% for the year, while the S&P 500 has remained fairly flat. When the historical performance is observed, the transportation index is up 65% in the last 10 years, while the S&P 500 has declined by 24%.

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FedEx Earnings Release

In its first-quarter earnings release, package delivery giant, FedEx saw net income increase by 110% from $181 million to $380 million on revenues increases of only 18%. Similar to many other corporations who were forced to cut cost while maintaining operation, FedEx used resources more efficiently than in previous years. Operating income increased drastically in the Express and Ground segments, while decreasing by 8% in the FedEx Freight business, resulting in a total increase of 99%.

Despite the year-over-year increases, the market did not reward FedEx as shares fell nearly 4.5% after the announcement. Although positive signals have been appearing in terms of holiday shipment volumes, management noted that they predict slower economic growth moving forward. As a result, approximately 5% of the workforce is expected to be cut from the payroll.

Expectations

FedEx, the second largest player in the air delivery and freight service industry, provided weak earnings guidance due to an expected increase in fuel, maintenance and repair costs in the second quarter. However, more indicators regarding the health of the overall industry will emerge when United Parcel Services (NYSE:UPS) and C.H. Robinson Worldwide (Nasdaq:CHRW) release their quarterly earnings performance results in late October. UPS and CHRW are the largest the third largest firms in the industry respectively.

Small Cap Delivery

While FedEx, UPS, and C.H. Robinson are incorporated in the Dow Jones Transportation Average, other lesser known firms are also key players in the air delivery & freight service sector and are subject to the similar economic conditions as the large caps.

Air Transport Service Group (Nasdaq:ATSG) has undergone massive cost cutting operations to maintain its level of profitability. On a year-over-year basis, earnings per share increased from $0.13 to $0.15 on a revenue decrease of 14%. EPS figures were higher because the salaries, benefits and wages expense fell by nearly 55% as a result of job cuts and overall downsizing. Head count declined by 24%. Although, the firm's financial results are mixed, Air Transport Service Group has doubled in price through 2010, largely thanks a long term aircraft and operating agreement with DHL.

The Bottom Line

The air delivery and freight service industry, like other areas within the transportation service sector, are forced to adopt a new business model by which they have to do more with fewer resources. While such measures are harmful to the overall economy, they improve the long-term efficiency of the business. As FedEx CEO said, the focus should not be on the short range, but on the momentum going into 2012 as the "headwinds from 2011 will be gone." (For more stock analysis, check out Facebook Surpasses Google.)

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