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FedEx (FDX)Stock (Air Delivery & Freight Services Industry, Services Industry, Transportation Industry)
 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 Office 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. [edit] ServicesFedEx Corporation was founded in the 1970s as an overnight air carrier. Today, FedEx is comprised of several independently operated companies, each offering different services. [edit] FedEx ExpressFedEx 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 $22.68 billion of FedEx’s $35.2 billion in 2007 revenues (64%). [edit] FedEx GroundFedEx 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 $6.04 billion in revenue in 2007, 17% of FedEx’s total revenues. [edit] FedEx FreightFedEx 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 $4.59 billion in revenues in 2007, 13% of FedEx’s total revenues. [edit] FedEx OfficeFedEx Office (formerly FedEx Kinko's) owns and operates a chain of more than 1,700 storefront business centers around the world. FedEx Office locations offer customers internet access, teleconference facilities, photocopying, printing and FedEx shipping services. FedEx Office earned $2.04 billion in revenue for 2007, which was nearly 5.8% of all FedEx revenue. The segment was created in 2004 when FedEx acquired the Kinko's chain for $2.4 billion. In June 2008, the company made significant changes in both its structure and expansion plans. FedEx has dropped the Kinko's name and will book a goodwill charge of $891 million. When FedEx bought Kinko's they paid a premium over the book value of its operations, goodwill. To offset this premium paid on the balance sheet, they create an asset. This charge means that they will subtract $891 million from that goodwill amount on the balance sheet. No actual cash will change hands, but FedEx's book value will fall by $2.22 a share. The company has also decreased expansion plans. After adding 300 stores in the fiscal year 2008, they now plan to add only 70 in fiscal 2009.[1] [edit] Trends and ForcesThe 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. [edit] Online retailingIn 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. [edit] International TradeThe 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.) [edit] Lean Supply Chain PracticesAs 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. [edit] Fuel CostsCarriers 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.[2] 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. [edit] FedEx Strategies[edit] Expanding International & Foreign Domestic Express BusinessThere 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 26% of the company’s revenue, up from 17% eight years ago. 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 2007 FedEx acquired DTW Group and PAFEX, previously its contract providers in China and India respectively. In November 2007 FedEx announced the opening of a new branch in Huzhou, China. Huzhou is considered to be one of the second- or third-tier cities in China. This market however, is growing very quickly and the opening of this branch reflects FedEx's goal to expand into growing markets internationally. The branch is considered state-of-the-art and will provide FedEx with the capability to streamline their delivery process in China.[3] 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. Moreover, FDX has a long standing relationship with TNT NV, Holland and merger talks has been around for a long period of time. "It would give FedEx a strong presence within Europe and the ability to offer comprehensive logistics and supply chain solutions," is the view of various analysts. [4] [edit] Expanding FreightMost 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. [edit] BundlingFedEx 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. [edit] CompetitionAmong 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. U.S. Domestic Parcel International/Foreign Domestic Parcel UPS.......................48% DHL.....................23%
Other.....................23% TNT.....................11%
FedEx.....................22% UPS.....................10%
DHL....................... 7% FedEx....................7%
Other...................49%
Yield, defined as revenue per package, is one important measure of a parcel carriers' business. FedEx's flagship company FedEx Express had an average yield of $21.72 in 2007, 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.
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