FedEx CEO Fred Smith said more shippers are transporting goods via ocean shipping at the expense air carriers, a modal shift reflected in the parcel giant’s recent earnings report.
Shippers’ shift toward slower transport services pulled down FedEx Express's fourth quarter operating margins from 6.5 percent to 4.1 percent on a year-over-year basis. Overnight volume dropped 5 percent in the same period, contributing to a 1.4 percent slip in total profit.
“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-airport commodity airfreight is not growing,” Smith told investors on June 20, according to a SeekingAlpha transcript.
The modal shift has driven more freight to FedEx Trade Networks, the forwarder and customs broker arm, and shippers also have been choosing to move freight “from international priority into international deferred” to cut costs, FedEx Chief Operating Officer and FedEx Express President David Bronczek said.
“The deployment of FedEx Trade Networks over the last few years we believe is a forwarding growth story that is often overlooked, but has achieved scale quickly and is continuing to grow and take share. In fact, management indicated that FTN is winning new customers on a weekly basis,” BB&T analyst Kevin Sterling wrote in a June 20 research note.
FedEx earnings confirm the trend among FedEx and other integrators building their forwarding services to scoop business away from traditional forwarders, he wrote.
FedEx’s 100 long-range wide-body freighters also allow the company to handle surges of high-tech shipments, giving it an advantage over smaller carriers and forwarders that don’t have the capacity. Even forwarder Panalpina “believes controlling some capacity is a key differentiator to offering customized solutions and the ability to quickly react to change,” Sterling wrote.
In a reaction to slower air freight demand, FedEx this month announced plans to retire 24 aircraft and shorten the depreciable lives of 54 older aircraft. The company’s fleet capacity will shrink 3 percent through the retirement of 18 Airbus A310-200s and six Boeing MD10 aircraft.
The company’s capital spending is expected to shrink to $3.9 billion, as the Memphis-based carrier takes delivery of fewer aircraft. Instead, more investment, will be pushed toward “the high-margin, high-return FedEx Ground business,” Chief Financial Officer and Executive Vice President Alan B. Graf Jr said.
The company plans to cut route times on the Ground service and expand FirstOvernight offerings in 2013, Graf added. Smith said the 3 percent jump in FedEx Ground volume was driven by a faster network and strong service, along with the growth of e-commerce. Shippers looking for cheaper transportation options also drove the growth of FedEx Ground, which saw revenue rise 9 percent to $2.5 billion, he added.
“Clearly, the economy and the moderate growth that we’re seeing to the bigger issue, and I think customers in general are being fairly conservative in terms of how they’re managing their supply chains until they see a little stronger growth,” said Michael Glenn, executive vice president of market development and corporate communications.