FedEx has dismissed the potential threat from e-retailers moving into parcel delivery, arguingthat the main parcel networks would continue to dominate delivery despite initiatives by companies
such as Amazon to develop alternative delivery systems for their customers.President and CEO Fred Smith said yesterday: “This is a big subject, and I don’t think I’ve seenany greater mythology in the press than the discussions about the e-commerce space in the last yearor so. But there are two enormous transportation networks that are built around moving lightpackages and freight, and they are FedEx and UPS. The size and scale of these operations are so bigthat it is almost amusing when you hear comments about people delivering items by drones.”
His comments during the company’s Q2 results conference call referred to reports that Amazon wastrialling delivery by drone and anticipating that it could become a reality within five years.
Smith said FedEx had its own drone expert, CIO Bob Carter. “He actually owns a drone, and hereports that it can operate for about eight minutes and carry four Budweiser beers!” he joked.However, Smith said he did not want to belittle UAS (Unmanned Aerial Systems) technology, becauseFedEx was also involved in a lot of studies in that area itself.
“But the whole issue about e-commerce is that it is very expensive to deliver things toresidences, and the transportation networks of FedEx and UPS, and to a lesser degree the PostalService, are designed around delivering very lightweight items.
“So, in certain situations, an Amazon.com or some very large e-tailer, they can unquestionablydo local deliveries should they choose to do so, and I think that some of them use various localdelivery options today. But for the vast majority of products, it is almost certain that they willbe moved by one of those three large networks, and then some of the smaller regional players, foras far as the eye can see.”
Mike Glenn, vice president of market development and corporate communications, commented: “Iwould say the important point to understand here is that e-commerce has a very long ‘runway’, bothdomestically and internationally, and FedEx is well positioned to benefit from both of those.Clearly, e-commerce is growing as a multiple of overall retail sales, but having said that, basedupon the Forrester research, it will be 2017 before online sales represent 10% of all salesrevenues. So we are still at the tip of the iceberg here in terms of e-commerce and itspotential.
“There are a tremendous amount of emerging trends in e-commerce, looking at how ‘big box’retailers are starting to respond, picking at store level to facilitate efficient next-day deliveryon a cost-effective basis, which FedEx is well positioned to take advantage of. So I would saythat, even though there is a tremendous amount of talk about e-commerce, we’re still in very muchthe early stage development of this channel, and we sit right in the sweet spot, with our broadportfolio.”
Glenn highlighted FedEx’s ‘Delivery Manager’ initiative, which he said had received a far highertake-up than expected “enabling our consignees to really take control of the transaction. Ourretail network enables people to get their packages when they want to; and with other technologyout there that we’re working on to further facilitate this.”
Dave Bronczek, president and CEO of FedEx Express, said the global experience andnetworks of the major delivery operators were also a key factor. “From Express’s point of view, theglobalisation of e-commerce and our global powerhouse network around the world, with all thesecustomers with global reach now, this requires a synchronisation around the world that is an artform, and we’ve been doing it successfully for decades.”
Looking at future express growth patterns, Smith said his expectation was for continuing slowgrowth of international priority (IP), partnered with continued more-rapid growth of internationaleconomy (IE), “the kind of traffic that can go in the underbellies”. Nevertheless, despite thegreater growth trend of IE and recent moves to reduce overcapacity in FedEx Express’s own-operatedintercontinental capacity, Smith insisted that the company’s “backbone” air network would remainbroadly as it is for some considerable time, with eight daily transpacific flights and seven dailytransatlantic rotations, plus some Asia-Europe services.
“In all likelihood, that is not going to materially change for some period of time. That networkis designed to offer competitively superior cut-off times and transfer times, and it is performingvery, very well. And our facilities are an integral part of speeding up those processes and makingthem more efficient, and handle the volumes, which sometimes have been inefficiently handledbecause facilities are very difficult to put together in certain parts of the world.” He said thecompany’s new facilities in Osaka and Shanghai would bring a huge improvement.
“So what you can anticipate, based upon what customers are telling us, is probably relativelyslow growth in the IP sector, with customers opting to take a day or two longer in transit in theinternational economy sector. But IP, which is the real key product line, is actually growing andthe yields are going up.”
The FedEx chief added: “So I think that what you’re going to see is not very much change in thenear term in the backbone network, and a lot of growth in the economy traffic – which lends itselfto being put in the underbelly, where the capacity is going to grow by about 5% next year accordingto the last report that I saw. With the B787, the B777, and the A350, there’s going to be atremendous amount of that underbelly capacity out there, which is very attractive in terms of costper pound, and we are very effectively utilising that, and our plans are to do even more of that.”& amp; amp; amp; amp; amp; lt; /p>
FedEx declined to say what percentage of its international economy shipments were now going inthird-party aircraft capacity, although Bronczek confirmed that international priority still madeup the majority of the company’s express volumes and therefore remained the key to the future,despite the higher rate of growth in international economy.
“We have had double-digit growth in IE for many, many quarters, but don’t forget that the IPproduct is still the dominant product that we have – it is over 70% of all our internationalpackages around the world. So, IE is going into other networks, the network that makes us moremoney, but the IP is really the key going forward.”
The comments to analysts followed the publication yesterday of solid FedEx second-quarterresults, boosted by significantly improved performance at FedEx Express, which recorded anoperating profit increase of 42%. Group revenue increased by 3% to US$11.4 billion (€8.3 billion),while operating income rose by 15% to $827 million, primarily due to yield and cost managementimprovements at FedEx Express.
FedEx Express reported revenue of $6.84 billion, down slightly from last year’s $6.86 billion,but the division’s operating income was up 42% to $326 million. IP revenue per package increased3%, while average daily IP volumes declined by 5%. IE average daily volumes grew by 10%, year onyear.
