FedEx provides a few clues about its cost-savings plans

Comment by JJ Hornblass on September 19, 2012 at 9:51am

Yesterday's earnings call included many insightful comments, but one from Fred Smith, FedEx's founder, stood out. Modal shift is always a factor to consider in air cargo, but when Smith plants a flag with sea freight, well, that deserves notice. And this concept of value per pound dropping also should be of concern to the air cargo industry.

Kevin W. Sterling, BB&T Capital Markets, Research Division: You guys have spent a lot of time talking about customer shifting to deferred services. Are you seeing more customers maybe taking a step further and shift from the air to the ocean? And, Mr. Smith, you briefly mentioned you guys are taking market share. Does that imply that maybe you've taken market share from the freight forwarder community as you build out the FedEx Trade Networks?

Frederick W. Smith, Founder, Executive Chairman, Chief Executive Officer and President: Well, what's going on in the movement of goods internationally in the Air Cargo segment, the door-to-door Express part of it is taking share from the traditional airport-to-airport cargo segment, and that's going to create a lot of issues as a tremendous amount of capacity that's been brought into the market, a lot of new aircraft by the traditional airport-to-airport providers, whether they're combination carriers or the pure freighter operators, that market is not growing at all. And, in fact, in the last several months, it's almost contracted about, what, 3%, I think? Something along those lines. So that's what I was talking about that Express is taking market share, and there are 3 major Express networks. We're the biggest in terms of transporting goods by air, and then you have UPS and DHL. And then there is clearly a diversion of traffic from traditional airport-to-airport air freight onto the water, and that's being caused by the falling value per pound of the traffic that's being moved. I mean we all benefit, particularly in the electronics sector, with improved pricing because of technology. Well, the thing that is most correlated to air freight demand or the air cargo market demand is the value per pound. So there is traffic that's moving onto the water because of that, and at the same time, over the last 10 years, the container liner services have gotten a lot better. I mean, there's now daily service from almost every major port in Asia to the major ports in the United States and Europe. This will be even more pronounced once the Panama Canal has expanded to the so-called Panamax-sized ships in 2014. So that's what I was talking about market share. The Express segment is taking market share from the traditional air freight segment, and the traditional air freight segment is losing some traffic to the sea freight area. And that's our strategy. We're participating in both of those, with FedEx Trade Networks in the sea freight area, which has been a major expansion effort over the last few years. It's really fantastic what our team has done there. And we're now an increasingly big player in that segment. And at the same time, our Express system has grown, but the customer has selected the less expensive of the 2 services that we offer, and it's -- we have to modify our system and our capacity to reflect that changed demand. So long answer, but you have to understand a lot. 

Comment by David Harris on September 19, 2012 at 9:59am

There was a lot of very interesting commentary from various FedEx executives during that call. For those interested, a full transcript is available here. Definitely worth a read.

It's also worth pointing out that UPS made the decision to focus on freight (as opposed to just express packages) about a decade ago, soon followed by DHL. The only one of the four integrated operators that went the other way was TNT, which sold off all its logistics activities.  I think there's a message in there somewhere.

Comment