FedEx has ordered a further four B767 mid-sized freighters and deferred the delivery of two moreB777 long-haul aircraft as it continues its fleet-renewal process and to adapt its express network
to emerging new trading patterns and customer demands.The move is the company’s third order in 12 months for B767-300 freighters and follows ordersfor 27 last December and a further 19 in June 2012 – taking the total to 50. Deliveries areexpected to take place between 2014 and 2018, allowing FedEx to replace its ageing MD-10 andA310-200 aircraft.
The order last December also included a deferral of the delivery date of several of the company’s B777 freighters, and the June order included a conversion of two B777 orders to B767s, as part ofthe company’s attempt “to better match capacity timing to global demand”.
David Bronczek, president and CEO of FedEx Express, said fleet modernisation was one of the “five pillars” of the company’s profit-improvement programme, which aims to improve profitability by$1.7 billion (€1.28 billion) by 2016, much of which is being done through realigning the FedExExpress network and resources to match current demand patterns.
Speaking yesterday following the publication of the group’s second-quarter results, Bronczeksaid: “We are very optimistic that the five-part plan that we presented in October is goingexceptionally well.”
He insisted that the relatively poor financial performance of FedEx Express in the quarter hadbeen the result of several “headwinds” coming together, including the effects of the globaleconomic uncertainty, Superstorm Sandy, the time lag between fuel-price increases andfuel-surcharge increases, and acquisition expenditure.
Revenue at FedEx Express was up 4% to $6.86 billion in the three months to 30 November, butoperating income declined 33% to $230 million and the division’s operating margin dropped to 3.4%,down from 5.2% the previous year. “We had a quarter that would have looked a lot better if thosefour issues had not hit at one time,” Bronczek said.
Commenting on the overall dynamics of the air freight market, Bronczek said: “Air freight out ofAsia-Pacific is doing quite well. A lot of it is our high-tech customers obviously at this time ofyear. There is a shift, however, in the overall market that has more express on the high end andmore freight IE (International Economy) type traffic on the low end, so it is actually going toplace into our network very well. Our volumes were up out of Asia-Pacific and they were also up outof Europe. So we are actually seeing some positive trends from our key customers in our marketsegment.”
Michael Glenn, executive vice president of market development and corporate communications, saidhe was unable to comment on whether FedEx had been taking market share in international express,for example as a result of uncertainty over rival UPS’s planned acquisition of TNT Express. Hecommented: “Market-share data trails, so it would be premature to make definitive statements aboutmarket-share gains at this time, although we have seen stronger performance out of the Asia-Pacificregion, and certainly stronger performance out of Europe.”
Bronczek added: “Our European organic expansion plan is right on target. Our strategic businesscase there looks very good, despite the weak economy there – they are executing on it. We madeimportant acquisitions in Poland and France and will continue to roll that out, and we are verypleased with the progress.”
“International Priority, which is a product used by a lot of our high-tech customers, grew 3%.International Economy grew at 14%. So going forward, there is a big opportunity there for us to putthose packages in the right network for improving our profits.” He said that acquisitions obviouslyincurred costs initially, but after about 18 months they start to contribute.
Fred Smith, President and CEO of FedEx Corp, yesterday insisted that the company’s restructuredexpress operation and the group’s other businesses positioned it perfectly for the emerging newtrading and shipping patterns worldwide, including the e-commerce boom, down-trading by domesticand international customers, and the possibility of further near-sourcing by customers.
“We are in all of these sectors, so really it’s just an issue of managing the capacity andputting the right traffic in the right network. Over the last couple of years, customers have optedto trade a bit of speed for a lower price, and that’s fine. We just have to make sure that theeconomy traffic is moved in the appropriate network, and we are moving it on the ground more asopposed to flying it as much.”
Smith said the market had moved more towards “drive-fly-drive rather than fly-fly”. He added: “That takes a bit of time [to adjust to], and one of the things we are most excited about in thelast couple of years is we have bought a great company in Mexico which will be a major beneficiaryof near-sourcing trends. We’ve got a great team down there and it is going very well. So we areprepared on either side for continued growth across the Pacific. I think the sector that wepioneered, the door-to-door express, will be the growth area, and we are also well situated fornear sourcing.”
Bronczek added “Yes, we have a great company in Mexico; we come across the border now in truckswhen it gets near-sourced. Or if it’s in Indonesia, or if it’s in China, or if it is in AustinTexas, those customers are telling us in advance where they are moving to and we align our networkto that.
“In some cases it is actually better for us financially when they near-source it. So we have agood line of sight on where these customers are and we have great businesses and great businessmodels around the world to handle it.”
He emphasised the growing importance of FedEx Trade Networks, the group’s freight-forwardingbusiness, to the strategy. “We are getting bigger in ocean and we are also getting better inforwarding air traffic, where we are on a small basis now, but hope to be larger as we go, where wecan’t justify flying an entire aircraft. That an important part of our strategy.”
David Rebholz, president and CEO of FedEx Ground, said there was “no question” that FedEx Groundwas taking share, but said it did not appear to be primarily due to uncertainty about rival UPS andits negotiations with the Teamsters union. “We have picked up a number of significant customersthat obviously stated concerns about the UPS situation, but I don’t think that is the primarydriver in this – otherwise we would have seen a lot more volume coming on board in the short term.So I think we are absolutely winning the game over the long run. I have no idea what the situationis with UPS and its contract; all I know is that we have customers coming on for thelong-term.”
Rebholz said all the signs indicated that the e-commerce growth would continue, but he did notexpect this to necessarily lead to an undermining of yields as this highly competitive area becamea bigger part of the business. “That’s not to say that the larger the customers, and as the marketchanges, that we could not envisage some downward yield risk as a function of customer mix, but notas a function of rate. I think we are in a very healthy position and the demand is very strong. Andit is true that our largest customers are seeing record years.”
Glenn added: “FedEx has been leading the industry in terms of overall yield improvement andyield management over the last couple of years. Our objective is to balance our yield improvementalong with volume growth in order to maximise profitability for each operating company, and we usea working group closely with each of the operating companies to make sure that we accomplishthat.
“Certainly during the quarter leading up to the peak season we do see a change in customer mixthat does put some pressure on the yield. But our long-term objective is to balance yieldimprovement and volume growth to maximise profits and that is what we are focused on. So, somequarters you will see yields a little higher; some quarters you will see yields a little lower. Butthe key is improving profits.”
Asked whether yields in express were being affected by economy products that competitors areoffering domestically over the last few quarters, Glenn commented: “Our yield strategy isindependent of what our primary competitor is doing. We have worked very closely with our expresscompany to identify opportunities, whether they are line segment-based or out of a particularmarket or region.
“We have had a lot of new contract negotiations in the quarter and we have worked very closelyto make sure we are getting the contribution that we need to get. What is really driving a lot ofthe yield issues in the market in general in express is the growth in e-commerce.
“Our Smart Post and Home Delivery services are ideal for growth in e-commerce, and at the sametime we are being more selective in the express segment when pursuing e-commerce opportunities.Certainly, Express benefitted in the quarter from strong e-commerce results, but we are moreselective in that regard perhaps than our primary competitor.”
