Integrators change course as clients go for ocean transport
This summer, FedEx opened two new gateways on the US West Coast for traffic entering its home market from Asia by ocean vessel. The integrator’s trade networks unit created gateway offices at the ports of Seattle and Oakland for traffic that moves in consolidations to the US and after breakdown is fed into the domestic FedEx network.
The focus on waterborne traffic is indicative not only of the weakness of the US economy and the impact of high oil prices on supply chain costs and strategies, it also shows a change in strategic thinking at FedEx.
Fred Smith said that FedEx was reviewing its strategy in order to position itself better to deal with an expected change in the way how its clientele was doing business. He outlined a new situation, where reliance on aircraft for shorter hauls is diminishing further. Increasingly, customers are cutting back on premium services.
The integrators remain bullish about their international express package business, particularly in Asia. FedEx and UPS are due to open their new Asian hubs in Guangzhou and Shanghai respectively this year.
Elsewhere in Asia, UPS bought out Korea Express’s share in their joint venture to assume full control of its express business in Korea.
According to some unconfirmed reports, FedEx is about to take a giant leap to boost its strength in the market, particularly on intra-European and Asia-Europe trade lanes. The integrator is allegedly seeking to acquire TNT. Both sides declined to comment on what they described as “speculation”. This summer, FedEx opened two new gateways on the US West Coast for traffic entering its home market from Asia by ocean vessel. The integrator's trade networks unit created gateway offices at the ports of Seattle and Oakland for traffic that moves in consolidations to the US and after breakdown is fed into the domestic FedEx network.
"There's a tremendous movement of the lower value-added traffic off the traditional freighter planes on to the water," said FedEx chairman, president and chief executive officer Fred Smith.
The focus on waterborne traffic is indicative not only of the weakness of the US economy and the impact of high oil prices on supply chain costs and strategies, it also shows a change in strategic thinking at FedEx.
Following the announcement of the integrator's first quarterly loss in 11 years, Smith said that FedEx was reviewing its strategy in order to position itself better to deal with an expected change in the way how its clientele was doing business. He outlined a new situation, where reliance on aircraft for shorter hauls is diminishing further. Increasingly, customers are cutting back on premium services, Smith warned.
With the domestic US market forsaking overnight air transportation for slower, less expensive solutions, the function of intra-US traffic is changing for the integrators, according to Smith.
"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," he said.
For companies such as FedEx, this means a need for greater emphasis on the interface between intra-US and international networks, Smith added.
The weak US market was a major factor behind the poor result in the most recent quarter for FedEx, the three-month period that ended May 31. The company tabled a USUSD 241 million net deficit, down from a USD 610 million plus a year earlier. FedEx suffered an operating loss of USD 163 million. At the FedEx Express unit, the integrator's core division, operating income dropped 31 percent to USD 426 million during the quarter. Its domestic express volume fell three percent.
UPS fared little better, with net profit tumbling 21 percent in the second quarter of 2008. The company's operating profit on domestic packages dropped 24.6 percent, fuelled by a 6.1 percent drop in overnight air shipping volume. Management blamed the results on the weak US economy and the soaring price of petrol.
Unlike FedEx, UPS can expect a windfall in its intra-US air express business courtesy of DHL's retrenchment of its US operations, which produced a USD 1 billion a year agreement under which DHL will use UPS for the line-haul of its intra-US air traffic. It speaks volumes about the market when a spokesman for UPS insisted that the Atlanta-based company would continue to have capacity for forwarders available on its domestic flights after it accommodates the DHL traffic and its own volumes.
Winding down its own US air network should stop DHL's blood-letting in North America over time, but now it is still a drag on the balance sheet. DHL parent Deutsche Post World Net posted a drop of USD 48 million in net profit for the second quarter to USD 396 million, which it attributed in part to the restructuring costs in North America, which weighed in with USD 73 million in the period.
The integrators remain bullish about their international express package business, particularly in Asia. FedEx and UPS are due to open their new Asian hubs in Guangzhou and Shanghai respectively this year.
Elsewhere in Asia, UPS bought out Korea Express's share in their joint venture to assume full control of its express business in Korea.
According to some unconfirmed reports, FedEx is about to take a giant leap to boost its strength in the market, particularly on intra-European and Asia-Europe trade lanes. The integrator is allegedly seeking to acquire TNT. Both sides declined to comment on what they described as "speculation".
The recent expansion moves from FedEx and UPS in the international arena have been concerned with expedited rather than top-of-the-line express offerings, reflecting the downward pressure on premium products from high oil prices and sluggish economic conditions.
FedEx expanded its international economy product, which had been launched in January, to three new Asian markets – Vietnam, the Philippines and Indonesia – bringing the number of countries covered in Asia to 13.
After having introduced its day-specific expedited freight service in Asia late last year, UPS decided to extend the offering to the Middle East in May.
