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| Table of Contents |
| Intro and Overview |
| Introduction |
| Business Overview |
| FedEx Strategies |
| Trends and Forces |
| Key Trends and Forces |
| Competition |
Key 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.
Pending Legislation in U.S. Congress Could Raise Labor Costs
The House of Representative's decision to pass a reauthorization bill for the Federal Aviation Authority (FAA) in May 2009 foreshadows a potential dramatic shift in labor law that would significantly raise FedEx's salary expense if the bill is made law.[1] Although employees of FedEx's main private competitor, UPS, are governed by the National Labor Relations Act (NLRA), FedEx's employees are subject to the Railway Labor Act.[1] As a result, unionized FedEx employees must hold a national vote on issues regarding their union. However, if the bill passes, they will be able to hold local votes, which would give the union significantly more leverage and power, and thus, would increase labor costs by as much as 30% for FedEx.[2]
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.)
Fuel Costs
Carriers use a lot of fuel. Fuel for air and ground vehicles accounted for 11.1% of FedEx's operating costs in 2007, remaining level from 2006. FedEx more than compensated for this cost increase with its fuel surcharge. Fuel surcharges as a percentage of other package charges rose slightly to 14.21% from 14.15% of charges for express packages and to 2.24% from 2.02% of charges for ground packages. Fuel surcharges are largely responsible for the 5% yield (revenue per package) growth in 2007. 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. Despite the fact that FedEx has managed fuel costs well considering its exposure, the current parabolic upward shift of the price of oil has proved to be too much. On 10 May 2008, FedEx announced a downward revision of the current quarter's earnings. The company lowered its estimates from $1.60-1.80 to $1.45-1.50.[3] This was a significant event and drove the entire market lower for the day - surging oil prices are even affecting companies that effectively pass fuel prices to customers. The company is instituting several cost-saving measures to offset oil prices. One of these is using higher capacity planes, which are already on order. (Read more about FedEx's Competition...)
References
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