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A Radically Changed International Air Freight Environment Prompts a FedEx Earnings Thud

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Supply Chain Matters has been keeping a close eye on global airfreight carriers FedEx and UPS to ascertain the degree of structural shifts and changing priorities occurring in international air freight. Readers may recall our previous commentaries in September and July of 2012 which pointed out that both global carriers had experienced a significant number of international shippers opting for lower-cost shipping methods. FedEx itself had initiated a series of re-structuring efforts related to its priority airfreight operations which took effect in the last calendar quarter of 2012.

Yesterday, FedEx reported that its latest quarterly profit plunged 31 percent amid a 4 percent rise in total revenues. FedEx CEO Fred Smith pointed to a poor airfreight market, overcapacity in package delivery and more dramatic customer shifts toward lower-cost transport modes as culprits.

Revenues for the Express division, which umbrellas international airfreight, came in at $100 million less than forecast. Operating income for the Express group plunged two-thirds along with an equivalent decline in operating margins.  Express’s margins in the February ended quarter were just 1.8 percent.  The company noted that while planes were fairly loaded, most of the load consisted of “deferred” or lower cost service freight, prompting the lower margins. FedEx identified segments originating from Asia and Europe as leading this trend. Because of these alarming trends, FedEx was forced to cut its full year forecasts.

FedEx further announced that the company will begin reducing capacity to and from Asia on April 1, and will “aggressively manage the traffic flows to place lower yielding traffic in lower cost networks.” That would include more use of FedEx Trade Networks, third party shippers, commercial airlines and a variety of other third parties. This, in our view, is a significant announcement.  Recall that the carrier had already taken previous measures to streamline capacity and consolidate routes. In essence, while shipment volumes remain steady, FedEx is getting burned by international and export customers opting for slower, less costly shipment methods.

As our transportation and logistics readers are all too aware, FedEx and other airfreight carriers were not at all shy in imposing aggressive increased rates and fuel surcharges for 2013.  FedEx had called for a 5.9 percent rate increase for 2013. Many international shippers probably had no choice but to try and compensate by enforcing policies for lower cost service options.  Starting in April, customers will now have to deal with the effects of FedEx offloading capacity to cheaper modes, with the potential for erosion in package delivery times.

There is therefore little doubt that the structural shifts in airfreight traffic are now confirmed, carrier bottom lines are being effected and capacity will be further reduced.  This, in our view, will leave shippers in a significantly changed transportation environment for the remainder of 2013, and perhaps beyond.

Just this week, Supply Chain Matters again pointed to the shipper abuse from the ocean container shipping industry, where rate increases continue to burden shippers with cascading reductions in operating schedules and overall service. The continuing situation of overcapacity in ships will invariably lead to either asset sales or industry consolidation.  Now, with international airfreight carriers taking dramatic steps to offload load capacity to other modes, something will have to give.  The international transportation industry is in all likelihood moving toward “asset light’ business models.  However, some entity or entities have to hold or justify the transportation asset by economic utilization. Whether this trend is temporary or permanent remains to be seen.

One thing is clear.  For international shippers, procurement and product management teams, transportation and on-time fulfillment is going to get extremely challenging in the coming months.  The ability to overnight shipments, compensate for delays in scheduling, or seize a market opportunity on a time sensitive basis are going to be constrained and expensive in cost, inventory and resources.

Teams should keep a very watchful eye on these developments and have contingency plans or alternative routing options always available.  If the price of oil were to spike across global markets, this situation would become even more dynamic. Teams would further be wise to leverage use of advanced inventory optimization, scenario planning and synchronized execution techniques to plan for various transportation and inventory contingencies.

Bob Ferrari

 

© 2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.  All rights reserved.

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