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Focus: Transportation Management

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From SCDigest's On-Target E-Magazine

June 26 , 2012

Logistics News: Looking at Transportation Trends Through the Eyes of FedEx

Many Shippers Moving to Slower, Less Expensive Modes, CEO Fred Smith Says; Company Expects Tepid Economic Growth in US and Globally Through 2013.

SCDigest Editorial Staff

FedEx is often looked at as a bellwether company for the US and now global economy, and of course with legendary CEO Fred Smith and its participation in most segments of the logistics industry, the company is also viewed as having its pulse on what is happening in transportation markets across the globe.

Given that, we thought it might be interesting to review FedEx's fourth recent financial results and earnings call for its fourth quarter, which ended May 31st. Those Q4 results were released last week.

SCDigest Says:

"Any time you see softness in the economy, you see some mode shift where customers re-evaluate their supply chains and look to see if they could rely on a slower mode of transportation in some cases or the lack of a time-definite service."

Fred Smith

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Overall revenue was up 4% in the quarter, to about $11 billion year over ear. Operating margins declined to 7.8% from 8.4% last year, and net income was basically flat at $550 million.

For the full year ending in May, revenue was up 8.6% to $42.7 billion, operating margins were up one percentage point to 7.5%, and net income was up a strong 30% to just over $2 billion.

FedEx Sees Tepid Economic Growth Continuing

FedEx invests a lot in global economic forecasts, led by Chief Economist Gene Huang, and so we are always interested in the company's economic outlook. FedEx executive Michael Glenn said that its forecast calls for US GDP growth for 2012 to be 2.2% and industrial production growth to be 4.3%. Since growth was below 2% in Q1 and may also be below that in Q2, that would imply expectations for more rapid growth in the second half of the year. For 2013, FedEx sees US GDP growth of 2.4%.

FedEx expects world GDP for this to come in at just 2.4%, a relatively weak number, but not surprising given a slowdown in China, the Euro debt crisis and other worrisome developments. That would compare with global growth if 3.6% in 2011 and 5% in 2010. Glenn noted that "It's important to point out that successful management of the debt crisis in Europe and the avoidance of significant tax increases next year in the U.S. are important assumptions in our forecast."

FedEx said that in the still sluggish US and global economy, many shippers are looking for cost savings over speed. For example, while package volumes were down 5% in the quarter in FedEx's US express shipments business, company executives stressed that analysts really needed to look at express and ground parcel segments as if they operated in one market.

"Weaker global economic conditions have driven a shift by our customers from premium services to our deferred products, and we expect that trend to continue in 2013," said CFO Alan Graf, meaning customers are switching from air express to ground in the US and priority air to regular air and ocean internationally. FedEx global air shipments were down 3% in the quarter.

Added Fred Smith: "Any time you see softness in the economy, you see some mode shift where customers re-evaluate their supply chains and look to see if they could rely on a slower mode of transportation in some cases or the lack of a time-definite service."

Consistent with this trend, the company said it has permanently retired 24 aircraft at FedEx Express to "better align the US domestic air network capacity to match current and anticipated shipment volumes." In other words, it expects air express shipments domestically to continue to decline in relative share, predicting that volumes in 2013 for express in the US will be lower than in 2012 despite some overall economic growth and continued growth in e-commerce sales.

(Transportation Management Article Continued Below)

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Smith indicated there will be an announcement in the Fall about further plans to reduce FedEx's domestic air capacity.

The company noted it is making continued investments to make its ground service more efficient, including automation of the planning and execution of free load and pickup and delivery processes and installing GPS devices on all trailers and dollies to improve fleet management.

For global moves, Smith added that he sees some fundamental changes occurring.

"I think, in the larger perspective, over several years now, it's very clear that the door-to-door express segment is growing, the movement of goods on the water is growing and traditional airport-to-a commodity airfreight is not growing," Smith said.

FedEx also said it is planning on unspecified changes to its FedEx Freight LTL segment network in July, and also that effective July 9, 2012, FedEx Freight will increase US and certain other LTL shipping rates by 6.9% on a list price basis.

The operating ratio (operating costs divided by operating revenues) at FedEx Freight fell to 94.2%, the best level since 2008. That is better than most other LTL competitors, many of which have operating ratios near or even above 100% of late, but still far above that of industry leader Old Dominion, which saw its OR come in at just 89.1% in the most recent quarter.

Smith noted near the end of the conference call that the way the company has to report its segment numbers can often lead to confusion about how FedEx really works.

"I think it's unfortunate to some degree that we have to report Domestic and International and Express because we don't look at it that way. It's one network," he said. "We haven't added a pound of "domestic airlift capacity" in years. The capacity in the United States is driven by the movement of intercontinental traffic that's moving through the network, to and from the hubs and onto an International destination or from an International destination to a U.S. destination -- from an International origin to U.S. destination."

Any reaction to FedEx's results or executive's comments? Do you think the trend towards slower, less expensive movement of goods will continue? Let us know your thoughts at the Feedback button below.

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One offsetting factor may be the continued growth of e-commerce and decline of the brick-and-mortar model, which creates an environment where timeliness is critical to the end customer experience. We see some shippers willing to take on additional transportation costs in order to promote fast inventory turnover, keep product fresh, and ensure that delivery is timely and predictable. Another offsetting factor would be the trend of near-shoring, should this continue to gain headway. Shippers may find that they can offset premium transportation costs by sourcing closer to home, and still manage a JIT inventory flow.

Jen
Account Manager
C.H. Robinson
Jun, 28 2012