Fedex: Europe Nearly Killed The MessengerChuck Hawkins
There was a time when the name Federal Express was not only synonymous with the express mail business--it was the express mail business. Even after a flock of imitators began offering "next day delivery," and fax machines became ubiquitous, Memphis-based Federal Express Corp. kept on growing.
But these days, founder and CEO Frederick W. Smith is finding that the industry he created 19 years ago is changing faster than he can say "overnight." After nearly two decades of building a reputation based on service, FedEx now is streetfighting with its competitors on price. And that means cutting costs at the traditionally expansionist company. Says Smith: "We're committed to lowering costs and prices at a rapid clip."
EURO THRASH. Smith showed just how rapid on May 1, when he began a decisive, and massive, retreat from the company's disastrous European operations. That's where FedEx piled up much of its $1.2 billion in international losses for the past four years. FedEx fired 6,600 employees, shut down operations in more 100 European cities, and contracted with two other companies to handle deliveries to all but 16 major business centers that it still serves directly for intercontinental shipments. FedEx is still king on its home turf, but there, too, it has been facing growing competition from such players as UPS, Airborne Freight, and the U.S. Postal Service.
Before the European retrenching, there was even a rumor that Smith's job was in jeopardy--though directors now deny it. Still, Smith is clearly under pressure. "We're not at the GM level," says one director, "but I can tell you the board is following this very closely."
The strain will continue for some time. Even Smith admits that a full recovery from the international debacle is not imminent. He's particularly worried about the economic slowdown in Japan. But Europe, too, may continue to plague him. The cutback there will reduce fixed costs by at least $300 million a year. Still, analysts predict that even after the downsizing, international operating losses may top $200 million in the fiscal year that starts June 1 (chart, page 126).
Some analysts are also worried that the downsizing in Europe may generate new problems as multinational corporations switch allegiance to companies with more extensive route networks there. FedEx insists that U.S. shipments to Europe will continue to be delivered on time--even if final delivery must often be handled now by its partners.
But rivals United Parcel Service Inc. and DHL Worldwide Express are swooping in to try to exploit such fears. Donald W. Layden, senior vice-president of international operations for Atlanta-based UPS, declines to estimate how much new business it will pick up. But his company is now preparing a major acquisition in Britain to complete its Western European network, and he predicts his firm will turn its first profit in Europe in 1994. European market leader DHL boasts that in recent weeks it has gained at least some European business from former FedEx customers, including Procter & Gamble, Ernst & Young, and British Petroleum.
NO SURRENDER. Why was FedEx's overseas foray such a disaster? When FedEx entered Europe in 1984, it faced entrenched competitors. And Smith admits he misjudged the size of the overnight delivery market in Europe. Expecting it to eventually rival in size the nearly 3 million shipments made daily in the U.S., he set up a costly hub-and-spoke air network based in Brussels. But European express shipments stalled out at only 100,000 per night, causing Smith to pull the plug. FedEx's fleet of widebody intercontinental freighters all-too-often flies less than full on flights back from Europe to the U.S., and also between the U.S. and Pacific Rim locations.
Smith argues that a retreat abroad doesn't mean surrender. Despite the current weakness, he thinks FedEx will eventually be able to fill up its Asian and European flights with more high-yielding express shipments and less heavy air cargo, which generates only a third as much revenue per pound. To meet this goal, FedEx is courting freight forwarders with juicier commissions. And since January, 1991, it has been the only cargo line offering an intercontinental overnight-freighter service that guarantees delivery of packages of up to 150 pounds by 10:30 a.m. to nearly all of the U.S. Smith also says FedEx is showing strong growth in its Business Logistics Service, which now generates sales of about $400 million per year by managing inventory and shipping for such companies as Laura Ashley. And on May 8, the company announced the opening of a PartsBank facility in Singapore, which, along with existing warehouses in Memphis and Amsterdam, is used to stock client firms' inventories for just-in-time shipments throughout the world.
Perhaps the largest savings will come through the use of more efficient aircraft. FedEx took delivery of the first of 13 MD-11s in May, and Smith says the savings are already dramatic: The smaller, widebody jets save $40,000 on a single Hong Kong-Anchorage run over what it costs to fly an older 747. Over the course of a year, the planes will save FedEx nearly $12 million on that route alone. The 13th MD-11 should be in place by September, 1993. But Smith still refuses to predict when the international business will break into the black. "What I can say is that we're moving down the road with what I believe is absolutely the right strategy," he says.
DISCOUNT DELIVERY. Smith has already implemented pieces of that strategy in the U.S., where it has helped defend FedEx's leadership position. Domestic operations have held up remarkably well throughout the recession. Despite a long-running price war with rivals UPS and Airborne, analyst David P. Campbell of Scott & Stringfellow Investment Corp. in Richmond, Va., estimates that profits of FedEx's core business in the U.S. will soar by 15%, to a record $789 million, in the coming fiscal year. Campbell expects the increase to come from increased volume and productivity gains. FedEx's market is certainly still solid. Colography Group Inc., a market research firm based in Marietta, Ga., pegs FedEx's market share at 43.3%--up from 40.4% five years ago--and still ahead of UPS's 25.2% and 14.3% for Airborne Freight Corp. The U.S. Postal Service is fourth with a 7.6% share for its Express Mail.
All of these carriers have benefited from an 89% jump in overnight shipments in the past five years, but the name of the game remains driving down costs. FedEx says price wars accounted for about half of the 8.4% drop in the last 12 months in its yield, or the amount of revenue collected per package, which fell from $15.28 to $14 in March. The rest came from a shift to cheaper afternoon or second-day deliveries.
FedEx isn't the cheapest express delivery service--except when it needs to be. Lower pricing helped FedEx beat out Airborne, which had the business, for the contract as exclusive carrier for Paramount Communications Inc. Robert G. Brazier, president of the low-cost carrier, told shareholders at Airborne's annual meeting in April that FedEx and other package carriers were pummeling the company on price. FedEx labels that a distortion. "We're just passing along productivity savings to our customers," Smith says.
Smith credits new technology for much of the productivity gains. He cites a new hand-held device that couriers now use to generate zip code labels. They speed the sorting process at FedEx's hub locations and cut down on the numbers of misrouted packages. And, of course, technological gains have allowed FedEx to hold down its payroll. That helps explain why FedEx has been able to hold down employment growth to 4.8% in the last year while its average daily volume of express packages is up 15% to 1.5 million units.
To build loyalty among its users, FedEx has installed so-called "Powership" computer terminals in more than 11,000 customer offices, which generate more than one-third of total volume. The terminals let customers prepare their own packages for delivery and then track them electronically, from point of shipment to final destination. FedEx has offered terminals to high-volume customers for several years, but now it is pushing them into many more offices.
New fuel-efficient aircraft also will be used domestically. FedEx expects to see major reductions in costs in 1994, when it begins flying the first of 25 Airbus A300-600 freighters on its U.S. routes. One A-300 with two pilots and two engines can carry the same amount of cargo as nearly two and a half 727-100s--with seven pilots and seven engines.
BULLET DODGING. Smith will feel pressure until substantial gains are won. Possible credit problems may haunt him. In March, Standard & Poor's Corp. lowered ratings on FedEx's commercial paper to A-3 from A-2, citing "near-term liquidity pressure" from the European restructuring. FedEx managed to persuade Moody's Investor Service that the losses had been stemmed, and dodged a credit bullet on May 5, when the credit concern confirmed the carrier's Prime-3 rating on its outstanding commercial paper. But if the CEO doesn't make good on his word, he could well find FedEx banished from the commercial paper market and forced to tap more expensive credit lines for operating capital.
Board members may be riding Smith tougher than they care to confess. Several sources say the board is pressuring him to find an outsider to replace Chief Operating Officer James L. Barksdale, who resigned last October to take the presidency at McCaw Cellular Communications Inc. "Whether we fill that job internally or go outside, it's not particularly useful to discuss the issue in the media," Smith says.
And the company's stock price exerts a silent and powerful pressure of its own. FedEx stock, now around 40, is well below its peak of 75 in 1987. Says Smith: "I'm absolutely determined that we meet shareholder expectations." With more than 8% of the company's stock in his private portfolio, Smith should have a very good idea of what those expectations are.