Commentary: Forwarding FedEx Growth

Amid a FedEx earnings call last week that was a virtual catalog of how shippers are weathering tough times by trading down to lower-priced forms of transportation, one story line stood out: FedEx has significantly expanded its FedEx Trade Networks international forwarding business.

Founder Fred Smith and others on the management team seemed animated about the prospects of a business that has seemed at times to be peripheral at a storied company dominated by express, less-than-truckload and home delivery. “We have a lot of upside potential with FTN,” David J. Bonczek, CEO of FedEx Express, said in the earnings call transcribed by Seeking Alpha. Within the past two to three years, some 100 cities were added to FTN’s network, up from only 25 or so.

“We’re going to continue to build scale at FTN, and we’re going to continue the expansion,” added Alan Graf, chief financial officer at FedEx.

Added Smith: “We’ve expanded over the last three years our FedEx Trade Network significantly, so we’re now a major player in a much broader international trade marketplace than we were just a few years ago.”

Key factors are driving FTN’s growth and leading it to be showcased in front of investors, including the overall shift in transportation spending globally toward lower-cost options, driven by a slowing global economy, lower-value products being shipped and higher fuel costs.

FedEx reported double-digit growth in its international economy service versus slight declines in international express volumes, and is experiencing declines in its U.S. express package volumes while seeing growth at slower-transit FedEx Ground services. It says product launches such as the iPhone aren’t the bonanzas they used to be.

A downshifting in transport is a trend that distinctly favors ocean versus air — ocean being a core competency of FedEx Trade Networks. Several forwarders have cited the air-to-ocean shift this year. Fuel is a big factor. “The world economy has absorbed an incredible increase in the price of fuel,” Smith said, “and that has had very big implications on the way people think about supply chains on their decisions to move ocean or whether they move things by air.”

For FedEx, being able to offer a viable waterborne service is an example of how it deploys a “portfolio” approach to its business — putting itself in a position to offer higher or lower priority options to customers as they adapt to changing conditions they face in their own markets.

“When we see weakness in the economy … we see a shift from our premium services … to deferred services to take advantage of lower transit times and lower rates. That’s just one way that customers manage their supply chains in difficult economic conditions,” said T. Michael Glenn, executive vice president for market development.

It’s a matter of “putting the right freight in the right networks,” one executive said. At the moment, with a slowing economy and higher fuel costs hitting shippers, that means helping customers trade down.

“The Express segment is taking market share from the traditional air freight segment, and the traditional air freight segment is losing some traffic to the sea freight area,” Smith said. “And that’s our strategy. We’re participating in both of those, with FedEx Trade Networks in the sea freight area.”

Part of what has enabled FTN to expand into so many markets, Smith said, is a steady expansion of ocean liner services. Although ocean carriers struggle to be profitable, service offerings have expanded, allowing third-party logistics providers such as FTN and others to effectively cater to shippers seeking lower-cost options backed by robust technology.

“Over the last 10 years, the container liner services have gotten a lot better,” Smith said. “I mean, there’s now daily service from almost every major port in Asia to the major ports in the United States and Europe. This will be even more pronounced once the Panama Canal has expanded to the so-called Panamax-size ships in 2014.”

In expanding its FTN business, FedEx is riding a wave of international ocean forwarders taking advantage of available ocean capacity to deliver a higher-value service based on track-and-trace visibility, which, for customers of FedEx, was a similar experience as when they were moving goods by air. As Bronczek said: “When (customers are) moving on the ocean, they still see the visibility, they still see the tracking, they still see the reliability of the service commitment on deliveries.”

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him at twitter.com/PeterTirschwell.
 

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