Fedex

Fedex (NYSE: FDX), whose full corporate name is Fedex Corporation, is a cargo airline, printing, and courier company offering overnight courier, ground, heavy freight, document copying and logistics services. Fedex is a syllabic abbreviation of the company's original name, Federal Express.

Fedex Corporation (NYSE:FDX) is a carrier service best known for offering express small package and document shipping. Since pioneering overnight shipping in the 1970s, Fedex has moved into slower and less expensive ground service for packages and into freight transportation. Fedex serves American business customers primarily but is moving rapidly into foreign markets. All but freight services are available to individuals through Fedex Kinkos storefronts (1300 in the U.S. and more abroad), which also offer printing, photocopying, internet access, and other business-center services.

Fedex is the clear market leader in express shipping, with 49% market share in the U.S. In ground shipping, it is only starting to establish itself in a market dominated by competitor UPS. In its freight businesses too, Fedex is gaining market share but its long-term success is uncertain. Fedex is placing a big bet on the expanded international network it is now developing. Building out an international shipping network creates high upfront costs. Fedex's success will depend on how quickly it can attract customers to this expanded network.

Fedex's profits are highly cyclical; they depend on the strength of the U.S. and world economies because economic health is a key determinant of package volumes. Package volumes and economic strength are so tightly correlated that economists will study package volume data from companies like Fedex as an indicator of whether economic activity is slowing or heating up.

History

The company was founded as Federal Express in 1971 by honorably discharged U.S. Marine Fred Smith in Little Rock, Arkansas, but moved to Memphis, Tennessee in 1973 after Little Rock airport officials would not agree to provide facilities for the fledgling airline. The name was chosen to symbolize a national marketplace, and help in obtaining government contracts. The company officially began operations on April 17, 1973, utilizing a network of 14 Dassault Falcon 20s which connected 25 U.S. cities. Fedex, the first cargo airline that used only jet aircraft for its services, expanded greatly after the deregulation of the cargo airlines sector. Federal Express' use of the hub-spoke distribution paradigm in air freight enabled it to become a world leader in its field. The company operates much of its U.S. overnight freight through its Memphis hub. Other U.S. hubs are located in Indianapolis, Indiana; Columbus, Ohio; Newark, New Jersey; Oakland, California; Anchorage, Alaska; Fort Worth, Texas; Los Angeles International Airport; Miami, Florida; Baton Rouge Metropolitan Airport; and, soon, Greensboro, North Carolina. The Canadian hub operates from Toronto Pearson International Airport. Due for completion in 2008 is the new Asian-Pacific Superhub in Guangzhou Baiyun International Airport; replacing Fedex Express' current hub in Subic Bay, Phillipines in Southern China increasing service levels and demands in Southern Asia.

In 2005, Fedex Express began expansion of its Indianapolis hub, which by its projected completion in 2010 will be one of the largest Fedex Express hubs.

In August, 1989 the company acquired Flying Tigers, an international cargo airline. It inherited Flying Tigers's U.S. military transport contract and carried passengers between the continental United States and overseas military installations until October, 1992. In January, 1998, Federal Express acquired Caliber System, Inc, which owned Roadway Package System, Roberts Express, Viking Freight, and Caliber Logistics. When these companies combined, the new organization became known as FDX Corp.

The name "Fedex" had been a popular, if unofficial, abbreviation for Federal Express for several years before the company chose it as its primary brand name in 1994. The new identity was revealed to the world on June 24, 1994. The "Federal Express" name was eliminated entirely in 2000, when FDX Corporation changed its name to Fedex Corporation and adopted the tagline "The World On Time" 1. In 2000, Fedex and the USPS signed a 7-year contract to carry all the USPS overnight and high-priority mail throughout the Fedex system. The postal contract has recently been extended until 2012 and USPS continues to be one of the largest customers for Fedex. In 2001, Fedex acquired American Freightways , a leading less-than-truckload (LTL) carrier, and combined them with Viking Freight to create Fedex Freight. In February 2004, Fedex bought Kinko's, a Dallas-based chain that provides copying/printing and business services, for $2.4 billion (most likely in response to UPS acquiring Mailboxes Etc). In May 2006, Fedex acquired the assets of Watkins Motor Lines, a leader in long-haul LTL freight transportation for $780 million cash. The purchase allowed Fedex to provide more choices for heavyweight deliveries, expanding its portfolio to meet customer demands. The company has been rebranded as Fedex National LTL, and is part of the Fedex Freight segment.

In its advertising, the company made famous the line "Absolutely, positively" for their overnight service; the original phrase was "When it absolutely, positively has to get there overnight." Another slogan, "Relax, it's Fedex ", is well recognized. For several years the company promoted the slogan "Don't panic", particularly on buttons. Throughout Europe, the marketing tag line is "whatever it takes". One major exception is Interior Alaska outside of Anchorage or Fairbanks local areas. Overnight packages are transferred to the United States Postal Service and then shipped either parcel post or first class mail with no tracking ability. Fedex marks the tracking of these items as "Delivered to customer" when the USPS receives the items.

Major competitors include UPS, DHL, and TNT, in addition to post office organizations around the globe.

Fedex

Federal Express is the world's largest express transportation company providing fast and reliable services for more than 2.8 million items in 212 countries each working day. The company employs approximately 130,000 people, has nearly 43,000 drop-off locations, and operates more than 580 aircraft and 38,000 vehicles in its integrated global network. Fedex maintains electronic connections with more than 650,000 users via Fedex PowerShip®, Fedex Ship® and Fedex interNetShipSM. Federal Express reported revenues of US$11.5 billion for its fiscal year ended May 31, 1997.

Asia- Pacific Operations

Fedex currently serves the Asia Pacific market with approximately 4,300 employees serving more than 30 countries and territories. The company provides the most extensive trans-Pacific air lift of any major competitor. Operating its own wide-bodied MD-11, DC-10 and A310 aircraft, Fedex offers over 250 flights per week to the following locations: Beijing, Hong Kong, Kaohsiung, Kuala Lumpur, Manila, Osaka, Penang, Seoul, Shanghai, Singapore, Subic Bay, Taipei, and Tokyo, as well as destinations in the U.S.

Services

http://Fedex.com/us/services/expressfreight/intl/prioritydirectdistr.html

International

Fedex Express Freight

International

Reach global markets by a certain time with customs-cleared, door-to-door service and flexible pickup and delivery options to more than 50 countries, backed by a money-back guarantee.

IPFS - International Priority Freight Service

Premier service – delivery typically in 1 to 3 business days. Customers with pieces over 68 kg to ship with virtually no limits on total shipment weight.

IEF - International Economy Freight

Deferred service – delivery typically in 2 to 5 business days.

Services

Fedex Corporation was founded in the 1970s as an overnight air carrier. Today, Fedex is comprised of several independently operated companies, each offering different services.

Fedex Express

Fedex Express offers package delivery to every address in the U.S. and to more than 220 countries and territories. Express services offered range from “First Overnight”—for next day delivery by 8 a.m.--to three day “Express Saver” service, which is often no faster than ground service. Slower express services differ from ground service in that they are time-definite. For each, arrival time is guaranteed and rates vary according to the distance a package travels. Fedex Express is the world’s largest express transportation company and by far the largest Fedex company. Fedex Express earned $21.4 billion of Fedex’s $32 billion in 2006 revenues (67%).

Fedex Ground

Fedex began offering ground service in the 1980s and expanded the business significantly in 1998 after the acquisition of Caliber System Inc. Today, Fedex Ground offers ground service to every address in the U.S., including home addresses, and every business address in Canada and Puerto Rico. Fedex Ground has grown steadily since its founding but still has only 17% share in the U.S. ground market. It earned only $5.3 billion in revenue in 2006, 16% of Fedex’s total revenues.

Fedex Freight

Fedex Freight provides less-than-truckload (LTL) freight service in the United States (including Alaska and Hawaii), Puerto Rico, Canada, Mexico, the Carribbean, South America, Europe and Asia. (LTL service consolidates material for several customers on a single truck. Drivers visit several customers a day, typically waiting while each loads or unloads shipments. LTL service is generally faster than full-truckload service, for which carriers leave trailers with customers and pick them up only when they are full.) Forged in 2001 after Fedex acquired LTL carrier American Freightways, Fedex Freight is a new but promising business. It earned $3.6 billion in revenues in 2006, 11% of Fedex’s total revenues.

Fedex Kinkos

Fedex Kinkos owns and operates a chain of more than 1,500 storefront business centers around the world. Fedex Kinkos locations offer customers internet access, teleconference facilities, photocopying, printing and Fedex shipping services. Fedex Kinkos earned $2 billion, 6% of all Fedex revenues, in 2006.

Trends and Forces

The parcel carrier business is highly vulnerable to economic cycles, particularly in the developed economies where Fedex operates primarily. In mature economies, package volume rises and falls with the economy. Production indices such as the industrial production index are good predictors of package volume because they measure material produced without regard for its price.

Still, there are few trends that should offset, in part, the impact of cyclical downturns on Fedex.

Online retailing

In the 1970s and 80s, carriers began to benefit from the growth of mail order businesses. More recently, that trend has been extended by the explosive growth of online retailing. Online retail sales exceeded $100 billion in 2003 and have grown at more than 20% annually since then. Fedex offers delivery to nearly every residential address in the United States. Its exclusively residential Home Delivery network also offers Saturday and evening deliveries. Home Delivery service positions Fedex to capitalize on the expansion of online retail sales. Fedex management expects to benefit from this trend and noted recently that the number of Americans with at-home internet access increased from 5 million to 73 million between 2000 and 2005.

International Trade

The parcel shipping business now generates about $125 billion in revenues globally, of which about $60 billion derive from U.S. domestic shipments. Package volume is certainly related to the global economy. But it is also increasing as a result of diminished barriers to trade and rapid development in emerging economies, particularly India and China, which are trade partners for the developed world. These increases have the potential to offset the effects of cyclical downturns. In fact, the international package market is expected to grow at 5-6% annually in coming years, nearly twice the rate of projected global GDP growth. (Package volume is the U.S. is expected to grow 3% annually, the same rate expected for average annual U.S. GDP growth.)

Lean Supply Chain Practices

As more businesses extend their supply chains around the world and aim for lean inventory practices, demand for guaranteed, time-definite shipping—particularly freight shipping for inventory and production purchases— will grow. Fedex Freight is well-branded for the demand created by just-in-time practices. Fedex is already a market leader in heavyweight express shipments and management attributes recent growth in Fedex Freight volumes to a no-fee money-back guarantee on arrival times. To most potential customers, “Fedex” means fast and the company may be able to leverage that reputation in the emerging express freight market. Today however, Fedex Freight service is still a new and relatively untested service.

Fuel Costs

Carriers use a lot of fuel. Fuel for air and ground vehicles accounted for 11.1% of Fedex's operating costs in 2006, up from 8.6% in 2005. Fedex more than compensated for this cost increase with its fuel surcharge. Fuel surcharges as a percentage of other package charges jumped to 13.69% from 9.1% of charges for express packages and to 2.5% from 1.8% of charges for ground packages. Fuel surcharges are largely responsible for the 5% yield (revenue per package) growth that Fedex Express enjoyed in 2006. They are also likely to result in losses this year a as result of fuel price drops. Fedex is more vulnerable to fuel price fluctuations than competitor UPS, for which fuel costs represent only 5-7% of operating costs, largely because a greater percentage of Fedex's business is fuel-intensive express shipments. Still, fuel costs should not cut too deeply into Fedex's profits. The company's growth projections are strong, its variable costs are low overall, and it has opportunities to institute cost-saving measures such as using higher capacity planes, which are already on order.

Fedex Strategies

Expanding International & Foreign Domestic Express Business

There is good reason to believe that Fedex will capitalize effectively on the growth of international trade. Revenue from Fedex’s international priority service—its primary international parcel express service— has grown at a compound annual growth rate of more than 14% for the last 8 years. It now represents more than 21% of the company’s revenue, up from 17% eight years ago.

To date, Fedex has expanded by acquiring some small carriers in strategically valuable markets and by forging contracts with others, known in the industry as global service providers. Fedex’s international acquisitions have done well in the past, and the company has achieved 10-15% return on invested capital every year since 2000. Fedex’s current network covers the largest emerging markets. Fedex currently offers more flights to China than any other American carrier (26 flights weekly) and has about 22% share in the Asian small-package market, more than any carrier except DHL, which has 32% share.

Still, it takes time to integrate acquired carriers’ networks into existing ones and to increase the volume shipped over acquired networks to the point where revenues meet expectations. To reduce the draining effect of acquisitions, Fedex has expanded into some strategically significant areas using contracts with local carriers initially, to reduce the risk of poor returns early on, and acquired those carriers only later as volumes reached critical levels. In 2006 alone, Fedex acquired DTW Group and PAFEX, previously its contract providers in China and India respectively.

In the long term, acquiring its own GSPs may yield the same results for Fedex that organic growth would yield. In the short term however, it reduces the likelihood that Fedex will have to file surprising earnings reports and may reduce the volatility of the share price for that reason. It also distinguishes Fedex from competitor UPS, which has generally expanded into new markets organically before making acquisitions outright.

Expanding Freight

Most freight transportation businesses look nothing like major parcel carriers. Parcel giants like Fedex, UPS, and DHL built their businesses on reliability, which is scarce in American freight transportation. Fedex has identified reliable freight service as an unfilled niche and established its LTL business with that niche in mind.

Fedex's guiding vision and the Fedex brand surely helped to attract its first freight customers. But Fedex Freight's operations have been solid as well. The company was forged by the acquisition of two LTL carriers offering service to complementary regions-Western regional carrier Viking (1997) and Eastern/Midwestern carrier American Freightways (2000-2001). Since these acquisitions, Fedex Freight's revenues have grown at a CAGR of 15%. Fedex's share of the regional LTL market is now about 12%, the largest in the market. This year, Fedex will acquire Watkins Motor Lines, a national LTL carrier that will allow Fedex to offer national (usually known as "long haul") service for the first time.

Fedex Freight's success to date can be attributed to good and complementary acquisitions, a simple strategic vision, and operations that satisfy that vision. Management continues to focus on expanding Fedex Freight. The scheduled Watkins acquisition will result in an immediate revenue increase and is also expected to stimulate regional freight business, as long-haul customers realize they can use Fedex for their regional needs. The most significant obstacle to Fedex Freight's growth is the slowing U.S. economy. Freight, like parcel shipping, is a highly cyclical business.

Bundling

Fedex hopes that it can cross-sell its increasing portfolio of services, boosting volumes for all. If customers believe they can reduce costs and logistical complexities by using Fedex for express, ground, and freight services, all three Fedex businesses will benefit. So-called "bundling" of different services is relatively new the transportation industry. It has become possible only recently as a few carriers have grown large enough to acquire carriers with different core businesses. The promise of bundling for Fedex's revenues is difficult to measure. Still, provided that each individual service is reliable, service bundling is a good strategy for capturing market share. If successful, bundling is also likely to help Fedex retain market share in the long-term because it increases the inconvenience for customers of switching carriers for any one service.

Competition

Among large, established parcel carriers, competition is stiff. Companies like Fedex must make enormous investments—in hubs, air and ground fleets, and tracking technology— to build the networks that make their business possible. Once networks are established however, the costs of increasing package volume (variable costs) are relatively low. This feature of their business encourages parcel carriers to compete for business on any basis available.

Price is one obvious point of competition. But it is rarely an issue in the mature U.S. parcel market. In 2004-2005, as international carrier DHL's pushed to expand its U.S. market share, some observers feared that a parcel carrier price war would ensue, reducing profits for all. In fact, prices remained quite stable, illustrating that the U.S. parcel market is mature, not highly fragmented, and unfriendly to new entrants. (DHL's U.S. expansion was less successful than expected.) Carriers like Fedex are slightly more likely to compete on price in international markets, which are more fragmented than the U.S.

In its core U.S. parcel market (express and ground), Fedex has only one large competitor. The combined express and ground market breaks down as follows but Fedex has a far larger share (49% estimated) of express business and only a small share (17% estimated) of ground business. Outside of the U.S., Fedex competes with three similar carriers--UPS, DHL, TNT--and many smaller private and government carriers.

Yield, defined as revenue per package, is one important measure of a parcel carriers' business. Fedex's flagship company Fedex Express enjoyed an average yield of $21.75 in 2006, compared to UPS Next Day Air's $21.14. It is no surprise that Fedex yields are higher than UPS's. By definition, yield reflects only average price charged per package and Fedex has long had a reputation for being more expensive than competitors.

However, yield is not a perfect measure for comparison, even price comparison. Large customers negotiate prices with carriers based on the mix of services they use and expected volumes. So individual customers may find that Fedex offers the best price for them even if it is expensive on average. Further, yield is of limited value as an indicator because it does not take projected volume growth into account. The high fixed-cost structure of the transportation business means that there is often lag time between when carriers invest in network expansions and when they see resulting revenue increases (as a result of increased volumes). Profits therefore rise and fall with volume relative to the size of the companies' networks. If one company can expect more still-unrealized returns on these investments in the coming year, their positions may not be as close as their yields suggest.

Unions

None of Fedex's roughly 15,000 drivers in North America are unionized.

Memphis, Tennessee-based Fedex in August said it had reached a tentative contract accord with its 4,700 unionized pilots, who are represented by the Air Line Pilots Association International.

BOSTON, Sept 28, 2006 (Reuters) - The International Brotherhood of Teamsters said on Thursday it would seek to organize Fedex Corp. truck drivers working out of the package-delivery company's Wilmington, Massachusetts, distribution center.

The union's statement followed a Sept. 20 decision by the National Labor Relations Board in Boston that the company incorrectly classified drivers at the location as independent contractors. It was the second such decision by the NLRB regarding Fedex drivers in Massachusetts this year.

Package delivery company Fedex had argued that the drivers were independent contractors and not eligible to unionize.

Links

 Wikipedia article