specialreport THE TRANSPORTATION MARKET
of leadership. The FedEx of the future will be an active
player in such segments as freight forwarding, rail intermodal, ocean freight, supply chain management, customs
brokerage, and postal services. It will aggressively court so-called vertical industries like health care, though in that
arena it has a long way to go to catch rival UPS Inc., which
has played on the verticals field for some time and recently opened its 36th facility worldwide dedicated to health
care logistics.
Most importantly, FedEx will play a larger role in the
ground parcel segment, a business it entered in 1998 when
it bought Caliber Systems, the then-parent of Roadway
Package System. At the same time, FedEx’s air express operation, particularly the U.S. segment, will no longer drive the
company’s fortunes as it has since its inception.
capacity increase over that period, reflecting what is projected to be explosive growth in the volume of merchandise
ordered online.
Its once-struggling less-than-truckload (LTL) division,
FedEx Freight, has turned the corner following a reorganization in 2011 that established two separate products with
different delivery standards and price points. Today, FedEx
Freight moves 14 percent of its total vehicle miles via rail
intermodal service, a telling commentary about the change
in FedEx’s mindset toward other transport modes. Until
recently, the company had virtually ignored intermodal.
SHAKEUP FOR THE EXPRESS UNIT
Not surprisingly, the impact of the corporate realignment
will be felt most deeply at FedEx Express. Of the $1.7 billion
in projected annual savings, $1.65 billion will come from
the unit. It will consist of staff reductions through voluntary buyouts; a migration to newer, more fuel-efficient
equipment such as Boeing 757 and 767 freighter aircraft
and the replacement of thousands of older trucks with
more modern vehicles; growth in its international business;
and targeted expansion into industry
verticals.
Perhaps most important will be a
realignment of the FedEx Express network to better match package volume
with flows. According to consultancy
TranzAct Technologies Inc., two examples cited by FedEx management at the
October meeting were the Houston
area, where five stations were closed
and replaced by two facilities, and the
Atlanta area, where 2 million miles of driving were eliminated by consolidating more than 100 surface routes.
In an Oct. 30 report, TranzAct said the overarching
themes of the streamlining are “The Right Solution to the
Right Customer at the Right Price,” and “Getting the Right
Packages Into the Right Network.” TranzAct said shippers
should not see any decline in delivery standards given
FedEx’s longstanding commitment to service quality. It
advised them to work with FedEx to understand how they
are perceived in the company’s eyes, what are the strong and
weak operating characteristics of their traffic mix, and if
they rank high in a “targeted” vertical in which FedEx is
anxious to do business.
For FedEx, the profit payoff could be enormous. Though
the air unit’s package growth is essentially flat—and barring
a drastic improvement in U.S. and world economies, is likely to stay that way—the revenue per package, or “yield,” has
still grown in the past two years by 11 percent to $15.46 per
package, not including the company’s fuel surcharge. If
FedEx hits its financial targets through the revamp, the
resulting savings and efficiencies will take yields on its
express product “through the roof,” said an industry official
who asked for anonymity.
A CHANGED MODEL
It’s a drastic change for a business whose culture has been
built around the idea that “fast-cycle” distribution is best
accomplished with the fastest means of transportation
available. But the reality is the domestic air market has stagnated for more than a decade as cost-conscious shippers burned by two
recessions abandoned premium-priced airfreight service in favor of
lower-cost surface transportation. As
part of their strategy to trade down in
transit times, they created regional distribution networks to allow them to
still meet their delivery commitments
without an overreliance on buffer
inventory, or on air service.
From 2001 to 2011, the domestic air market shrunk by
two percentage points a year, according to The Colography
Group Inc., an Atlanta-based research and consulting firm.
During that time, FedEx and its chief rival, UPS Inc., gained
share of the overall market, though UPS grew its cut of the
market at a faster clip, the consultancy said.
By contrast, the ground parcel market grew annually by
the equivalent of half of one percentage point in that same
10-year span, according to Colography Group data. FedEx
Ground, the company’s ground parcel unit, gained one percentage point of share annually, while UPS lost one percentage point of share, according to the data. Most of
FedEx’s share expansion came at the expense of UPS, the
consultancy said.
In 2011, 60 percent of FedEx’s domestic volumes, on a
point-of-sale basis, moved on the ground, according to The
Colography Group. In 2001, it was about 40 percent.
In response to the secular change in shipping patterns,
FedEx Ground will expand its capacity so as to be able to
handle 45 percent more shipments by its 2018 fiscal year. In
addition, FedEx’s SmartPost operation, through which it
funnels mostly e-commerce shipments to the U.S. Postal
Service for “last-mile” delivery, is primed for an 85-percent
