FedEx Corp. and competing cargo airlines are finding theiryields squeezed in an economy that Alan Greenspan once observed isputting good things in ever-smaller packages.

Both FedEx and United Parcel Service Inc. have posted drops inrevenue per package this year. With clients used to paying byweight, softer demand from a weakening global economy has hamperedthe carriers' ability to change the way they set rates.

“If weight per shipment was going up, that was always a goodsign,” said Kevin Sterling, a BB&T Capital Markets analyst inRichmond, Virginia, who has a buy rating on both companies. “Thatis no longer a valid key statistic to look at to determine if thefreight economy is improving. Everything seems to have gottenlighter.”

FedEx and UPS are grappling simultaneously with sales growththat has slowed from more than 10 percent in mid-2010 to less than5 percent in the most recent quarter, and they have trimmedfull-year profit forecasts. Shares in both companies haveunderperformed the broader Standard & Poor's 500 Index thisyear, with UPS falling 1.9 percent through yesterday and FedExrising 1.1 percent.

The pressure on their performance from smaller manufacturedgoods, which affect all cargo companies, can be seen on a broaderscale in the tonnage of U.S. gross domestic product.

The measure has been stagnant for decades, which implies acontinually dropping weight per dollar, Greenspan, the formerFederal Reserve chairman, said in a telephone interview thisweek.

“The development of the integrated circuit has had a dramaticeffect on making the world into ever smaller units,” Greenspansaid. He cited Moore's Law, the principle associated with IntelCorp. co-founder Gordon Moore that the number of transistors on anintegrated circuit doubles every two years.

Products such as televisions built by Emerson Radio Corp.illustrate the magnitude of miniaturization in the 13 years sinceGreenspan discussed it in a 1999 speech in Dallas.

A 22-inch cathode ray-tube set from 2002 weighs about 75 poundsand is almost 2 feet thick, while an Emerson LED model with thesame screen size, available today, weighs just 7.5 pounds and isonly 2 inches thick.

Freight intensity, measured as the ratio of total ton-miles toGDP, shows that freight activity required to produce goods andservices in the U.S. dropped from 0.59 ton-mile per dollar in 1970to 0.38 ton-mile in 2002, according to the federal Bureau ofTransportation Statistics.

'Big Winners'

Shippers and consumers are the “big winners” of the trend, saidAaron Gellman, a professor of management and strategy atNorthwestern University's Kellogg School of Management. Thoughcargo companies are likely to respond with changes to the way theycalculate rates, those may be years away, he said.

At present, both companies base rates on volume, distance andservice level, according to spokesmen.

The timing isn't right for major changes to pricing systems,Satish Jindel, president of SJ Consulting Group in Sewickley,Pennsylvania, said in a telephone interview. “As the carriersmodify their dimension of charge, more customers are going to say,'How much of my transportation involves air? Nobody's buying, sowhy am I shipping air?'”

The Drewry Air Freight Price Index fell 13 percent in Augustfrom July, the largest drop in 20 months, and was 17 percent lowerthan a year earlier. The average rate was $3.32 a kilogram, thefourth consecutive month below $4. Since the start of 2011, theaverage rose as high as $4.61, in October.

At FedEx's Express unit, the Memphis, Tennessee-based company'slargest, revenue per package pound has dropped on from a yearearlier for the past six quarters. Sales of $2.20 a pound in thethree months through August compared with $2.66 in the same periodin 2010.

UPS's revenue per package from next-day air delivery in the U.S.declined from the previous year in the first two quarters of 2012,with a drop of about 2 percent to $20.42 in the period throughJune.

Chief Financial Officer Kurt Kuehn noted a “meaningful decrease”in weight per shipment in the 2011 holiday season. The company'slightweight products, tailored to take advantage of the change,benefited from smaller goods such as tablet and portable computers,he said.

FedEx spotlighted the strains on its business this month when itcut its profit forecast, sending the shares to their biggest dropsince June 1.

Fundamental Change

Shipping has faced a fundamental change in the past few months,with exports and trade declining faster than global gross domesticproduct, FedEx Chief Executive Officer Fred Smith said on anearnings call at the time. The reverse was true for the past 25years, excepting meltdowns in 2000-2001 and 2008-2009, he said.

Quarterly volumes fell for FedEx's premium delivery services inthe U.S. and overseas as slowing growth in China, the European debtcrisis and unemployment above 8 percent in the U.S. promptedmanufacturers to switch to less-expensive shipping methods thatgenerate less income.

“Trade down” has also been an issue in recent years forAtlanta-based UPS as customers have tightened budgets, said MikeMangeot, a spokesman for the company's airlines service.

UPS cut its full-year forecast to $4.50 to $4.70 a share from$4.75 to $5 a share in July after second-quarter profit trailedanalysts' estimates. FedEx lowered its full-year earningsprojection to $6.20 to $6.60 a share from $6.90 to $7.40 a share inSeptember.

Technology isn't the only driver in shrinking sizes. Some ofU.S. output's weight loss is due to environmental conservationefforts such as cutting carbon footprints.

Apple Inc. touts smaller iPhone containers on its website,saying “efficient packaging design not only reduces materials andwaste, it also helps reduce the emissions produced duringtransportation.”

The iPhone's package volume was cut 42 percent from 2007 to2011, letting the company ship 80 percent more boxes in eachairline shipping container and saving one flight on a Boeing Co.747 jumbo freighter for every 371,250 units it ships, Applesaid.

Along with drawbacks, cargo airlines also stand to garnerbenefits from rapid technological change as consumers seek toreplace goods that are quickly outdated.

“Short product cycles and obsolescence cost drives the actualturnaround of products, which again increases the actual shippingvolumes,” Rob Siegers, president of the global technology sector atDHL's Customer Solutions, said in an e-mailed response toquestions.

'How Small?'

The demand for the latest high-tech products like Apple's iPhone5 illustrates that, said Donald Broughton, an Avondale Partners LLCanalyst based in St. Louis.

“Airfreight will go on to establish all new highs, becausethat's technology,” he said. “We want it immediately from whereverwe want it.”

Cargo companies can further improve their situations by cuttingcapacity and improving enhancements such as real-time trackingservices, which will help them regain pricing power, analysts said.The arc toward tinier sizes has its limits, they said.

“How small is a cellphone going to get?” Kellogg's Gellmanasked.

Already, demand for smaller cellphones has been mitigated assome customers press for screens large enough to meet individualusage needs, DHL's Siegers said.

“In the past, mobile phones had to be as small as possible,” hesaid. “Today there are different smartphones with different screensizes on the market.”

Another boost for cargo companies is in the higher price tagcarried by smaller electronic items, said Raj Subramaniam, FedEx'ssenior vice president of global marketing.

“Electronic products have been getting smaller for years,” hesaid. “When that happens, the value per pound goes up. When thathappens, it's more likely to go on an express transportation modethan otherwise.”

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