Remaking FedEx’s Market

The numbers from the world's largest express operator suggest the company and its market are undergoing dramatic change. Demand for international airfreight is strong but the slowing U.S. domestic business reflects shippers' increasing preference for time-definite ground services.
Fedex reported record results in the quarter ended Aug. 31 even as domestic express business remained stagnant and rival DHL reported it would lose more than expected in the United States as it ramps up its operations there.
FedEx chalked up a 23 percent increase in revenue in the last quarter to reach $6.98 billion. Its operating profit surged from $200 million in the period a year ago to $579 million, while the operating margin went up from 3.5 percent to 8.3 percent.
The bottom line was that net profit more than doubled, to $330 million.
A $490 million revenue contribution from Kinko's, the retail business services chain FedEx acquired for $2.4 billion, skews the numbers but still leaves plenty of reason for FedEx to celebrate.
There is strong evidence that the world's top air express carrier is remaking itself on the fly and becoming more profitable at the same time.
The celebration will focus mostly on the company's success on the ground, where FedEx saw parcel and freight shipping grow at a double-digit pace over last year.
A new study of the express market (see sidebar), concluded shippers are using more ground transportation as a strategy for warding off potential supply chain disruptions.
It's a lesson that FedEx rival DHL has taken to heart. DHL is spending huge sums on infrastructure, much of it aimed at improving its capabilities in the ground operations that are a major contributor to FedEx's growing profits in a changing market for expedited services.
FedEx says the growth of FedEx Ground and FedEx Freight is allowing the company to bid for business across various modes, and pick up freight even though industrial shippers in the domestic market remain focused on keeping costs lower through cheaper ground services.
FedEx Freight has become one of the country's leading LTL carriers, reporting 27 percent growth in revenue in the quarter to $807 million, a 14 percent gain in LTL shipments and a $103 million operating profit that pushed the operating margin from 9.6 percent last year to 12.8 percent this year.
FedEx Ground saw revenue grow 17 percent, volume jump 16 percent and an operating profit of $147 million that was 27 percent over last year.
Strength in international air express overshadows a weak domestic scene. Although revenue was up 12 percent, the core domestic package volume was down about 2 percent and the big growth came outside the United States.
International Priority business was up 25 percent, including a 52 percent gain in volume out of China.
With the recent Department of Transportation award of additional traffic rights to China, that segment will grow even more in stature, and FedEx is preparing for even greater expansion abroad.
Last month FedEx bought from struggling Delta Air Lines eight MD-11s that will be converted and enter service in a couple of years.
FedEx Chief Financial Officer Alan Graf attributes the domestic decline to "loss of a corporate customer in a transition from express to ground by another large customer as we continued to compete collectively." Without that, the result would have been positive, FedEx claims.
Mike Glenn, executive vice president of market development and corporate communications, said the domestic express market has been slow for some time. "If you look at the last few quarters, there's been no growth at all; it's actually been a decline," he said.
FedEx Chairman Fred Smith attributes the decline to the electronic incursion on the document and envelope business and the decline of the value per pound of certain technology items, which has encouraged migration of formerly dependable air shipments to a "time-certain ground cycle." He said some industrial traffic has shifted from domestic to international movements, presumably because of the move toward offshore manufacturing, which actually means higher margins for the integrator.

Results of express carrier show market shift as ground, LTL grow ahead of air shipping