Economies of Traffic Density and Scale in the Integrated Air Cargo Industry: The Cost Structures of FedEx Express and UPS Airlines

This paper examines the cost structures of the leading integrated air cargo carriers, FedEx Express and UPS Airlines. A total cost model is estimated for the two carriers using quarterly data on domestic operations and costs over a nine-year period (2003-2011). The estimated model indicates that the integrated industry exhibits increasing returns to trac density and constant returns to scale. Accounting for carrier-speci c di erences in cost structure
and network size, FedEx Express is found to be more cost-ecient than UPS Airlines. Looking at the carriers individually, UPS Airlines exhibits substantial economies of density and constant returns to scale while FedEx Express’ cost structure is characterized by weak economies of density and constant returns to scale. The combined e ect of returns to density and returns to scale on the cost structures of integrated carriers is captured by economies of size.

Both FedEx Express and UPS Airlines exhibit economies of size, indicating that carriers in the integrated industry can be more cost ecient by making
appropriate adjustments to their network size as their output grows. Moreover, the relative cost-eciencies of the carriers are reversed when their network-size di erences are not controlled.

By Paulos Ashebir Lakew at


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