FedEx downshifts

While harboring hopes the U.S. economy will turn around and fuel prices will start to level off, FedEx is positioning itself for what company officials say is an altered industry landscape.

Frederick W. Smith, FedEx chairman, president and chief executive officer, said in the wake of the company’s first quarterly loss in several years that FedEx is rethinking its foundation express operations and even the way it gears up for international traffic.

“FedEx Express has not bought a unit of capacity for the domestic express business in years and years and years,” Smith told investment analysts in a conference call on the company’s earnings.

Instead, Smith said, is looking at a new era of air shipping that includes still lighter reliance on aircraft for shorter hauls and a focus on fitting the domestic network into a global supply chain.

That is where increasingly savvy customers, he said, are cutting back on premium services and streamlining.

“The network in the United States has been expanded basically to move inland international traffic,” Smith said. “Increasingly in the international market the movement of goods by air will be in smaller lots and door-to-door express movements rather than in the large consolidations that marked the industry structure several years ago.”

FedEx has benefited from the broad industry trends in recent years, gaining express parcel business as shippers have broken down larger consignments and taking on ground package and trucking volume in its growing surface divisions as cost-conscious shippers have traded down in mode.

But domestic express volume has been flat at best in recent years and now Smith acknowledges that the ideal target for air express is the international shipper rather than the domestic business.

“We’ve built a network of regional (operations) and what those regional operations allow us to increasingly do is to fly across the oceans and then drive on the other side,” said Smith. “We have not been adding capacity for the domestic express market for many years.”

But the mode shift is not just limited to express traffic, Smith said.

“What’s going to happen in the international marketplace. … is the traditional airport-to-airport freighter services are being reduced and coming down,” Smith said. “What’s happening is the mode shift in the international arena makes what happens in the domestic express business pale in comparison.

“There’s a tremendous movement of the lower value added traffic off of the traditional freighter airplanes onto the water, onto the sea.”

He said FedEx’s expansion into trucking services positions the company for the changes but his remarks suggest more changes in company strategy could be coming.

“I just came back from Europe last week and again went to a couple of our locations and you can see this taking place right in front of your eyes,” Smith said.