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VOL. 127 | NO. 185 | Friday, September 21, 2012

Speculation Mounts for FedEx Changes

By Bill Dries

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The annual FedEx Corp. meeting with investors next month will be watched closely for what happens to FedEx Express, the oldest division of the Memphis-based company.

SMITH

That is when FedEx executives, including company founder Fred Smith, said they plan to announce in rich detail how they will answer the shift of customers away from air freight – the method of moving goods that FedEx pioneered 41 years ago.

Whatever the fix is, it comes near the end of a year that began with FedEx executives expressing a stubborn optimism about the way back from recession. The optimism was based on what FedEx was hearing from its customers. And when the recession lingered, FedEx’s view became that it was a “soft patch.”

“Systemically, the policy choices that have been made in Europe, the U.S. and China are having an effect on world trade,” Smith said Tuesday, Sept. 18. “In the last several months, it’s been disappointing. I think it’s reflective of the slow growth in the United States. You’ve got contraction going on in Europe. Because of North America and Europe, China’s export economy – which has been driven by the consumer economies – is reflected in lower trade numbers. Until some of these macro issues get resolved, you’ll see relatively low trade numbers.”

Jeff Kauffman, an analyst for Sterne Agee, was among those on the call who thought FedEx wasn’t tipping much of its hand on the Express “reconfiguration” before the Oct. 9-10 investors meetings in Memphis.

The Sterne Agee note the next day to investors said the change that was announced to the FedEx network cost structure is “almost a decade overdue.”

“Not calling this a restructuring is like calling a party a small get-together. But perhaps it is much more,” the Sterne Agee note continued, referring to Smith’s specific objection to the term “restructuring” to describe what is ahead for Express.

Sterne Agee expects a “complete network redesign” that decreases the emphasis on aircraft with a greater use of trucks in the domestic market and forwarding in international networks. Forwarding is a service that organizes shipments for customers and is more of a supply chain manager for companies that don’t have that function in-house.

Kevin Sterling of BB&T Capital Markets was on the conference call and asked Smith if the shift from air to water for freight in recent years is a larger shift with broader implications.

Smith said the shift is more than a function of the economy and customers moving to less expensive options when the time for delivery is variable.

“Over the last 10 years, the container liner services have now gotten a lot better,” Smith said, noting daily service. He said the improvement and move to water will become more pronounced with the Panama Canal expansion in 2014.

The note on FedEx the next day from BB&T said the reconfiguration of FedEx Express could mean offering less scheduled air capacity.

Smith, however, said that doesn’t necessarily mean a corresponding increase in scheduled ocean capacity.

“We manage that by adding extra sections and extra capacity,” Smith said of the super express freighters in the FedEx Trade Networks division. “We have been very reluctant to add schedule capacity.”

Smith also indicated product launches of electronics by Apple and Microsoft that were once seen as the low-weight, high-value exclusive territory of air are going to ocean.

“You have products that are getting lower in value per pound, which is the key correlation for goods being moved by air,” Smith said. “They are going on the water to an improved container system.”

But Smith also told analysts the traffic from such product launches is “episodial.”

“The product launch of the Apples and Microsofts is not going to provide the kind of sustained growth in international trade that the world has seen historically,” he said.

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