FedEx CEO Fred Smith is expecting demand for premium express services to remain subdued until theeconomic macro conditions in the US, Europe and China change, with world trade no longer expanding
at a faster rate than GDP.Speaking yesterday following the release of the company’s first-quarter results to 31 August,Smith said world trade and export levels had been “disappointing” over the last few months,particularly since the start of this fiscal year, with the FedEx reporting customers ‘down-trading’to cheaper, slower delivery options across all segments of the company’s activities.
“Fundamentally, what is happening is that exports around the world have contracted, and thepolicy choices in the US, and Europe, and China have had an effect on global trade,” said Smith. “Global trade has grown faster than GDP for the last 25 years, apart from the 2000 to 2001 meltdownand in 2008 to 2009, but over the last few months that has not been the case.” Smith said heexpected little significant international premium express growth over the coming quarter, and thatit was unclear how global trade would develop in the longer term.
“I think that remains to be seen. The global trading economy is still the largest singleeconomy in the world, but over the last several months, it has been disappointing,” he observed. “Ithink it is a reflection of the low growth in the US, and we have a contraction going on in Europe,and that has affected China’s export economy, which has been driven by the consumer economies inthe US and Europe, and this is reflected in the lower trade numbers.
“So I think that until some of these economic macro issues are resolved we will seerelatively low international trade numbers. Having said that, we are taking market share in theintercontinental trading area, but the problem is that the mix of traffic and reconfiguration ofour network was made around a certain set of assumptions.”
He said FedEx would next month reveal to investors a significant adjustment to itsinternational express operations, in response to the shift in demand from high-yield internationalpriority to cheaper deferred services due to the current stagnant economy, which had driven downyields and margins in the last three months. FedEx reported a 2 per cent decline in its ‘international priority’ express parcel volumes during the quarter, but a 13 per cent increase inits deferred ‘international economy’ volumes. The company’s overall international export averagedaily package volumes grew by 1 per cent, driven by increases in international economy traffic fromEurope and Asia.
He said the market-share growth came from FedEx and other door-to-door international expressoperators taking business from traditional airport-to-airport air freight operators. Meanwhile,traditional air freight operators had also been losing market share due to a modal shift to seafreight.
“There is clearly a diversion of the traditional air freight onto the water, and this isbeing caused by the falling value per pound of the traffic being moved – which is the thing that ismost correlated with air freight demand,” Smith added. “And at the same time, fuel prices haveincreased and the container liner sector has significantly improved over the last 10 years. Thereare now daily departures from almost all the major Asian ports to the US, and into Europe, and thiswill become even more pronounced once the Panama Canal is expanded in 2014.”
He said FedEx was benefitting from these developments, which was part of its strategy, withthe FedEx Trade Networks (FTN) business growing rapidly to become “an increasingly importantplayer” in the ocean freight sector, and was now big enough that there was no customer that itcould not tender for.
“So we have to modify our system and our capacity to reflect that change in demand,” Smithadded.
While new product launches this autumn and winter from the electronics sector, such as Apple’s iPhone 5, would boost volumes to an extent, these were “episodial” increases in demand and thesevolumes were “not going to provide the kind of sustained growth in international trade that theworld has seen historically.
“We manage these kinds of product launches by adding extra sections and capacity and we havebeen very reluctant in the recent past to add additional scheduled capacity,” said Smith. “We meetthese requirements with variable capacity and that is probably going to be the case in theforeseeable future: we will probably put up very little incremental scheduled capacity.”
