The Wall Street Journal had an interesting article on the changes FedEx is facing, as part of a more global shift in the industry (“FedEx CEO Predicts Industry Shift“).
Recent industry changes have hurt FedEx as some customers have opted for slower-moving, nonpremium delivery services in the soft global economy. Volume for FedEx’s international-priority-airfreight business declined 3% in the company’s fourth quarter, which ended May 31, after falling 1% in the fiscal third quarter. U.S. domestic-express volume fell 5% in the fourth quarter, compared with a 4% decline in the third.
This is hardly surprising. As the economic situations becomes more difficult, customers are less willing to pay for quick response, and thus firms are less willing to use more expensive modes of transportation. The reaction is not surprising as well:
The Memphis, Tenn., company plans to disclose a “comprehensive program” in October to cut costs and better align the size of its express air fleet with anticipated market demand, Mr. Smith said.
A few years ago, the New York Times had an article, titled “The FedEx Economy.” The article described the operational choices FedEx made to support its strategy of quality, responsiveness and flexibility, at the expense of cost. In particular, the article described the practice of having 5 empty planes fly in indirect routes every night to accommodate any disruptions. It also mentioned that 10% of the planes fly half empty, by design, to have flexible capacity. Every package that touched the ground had to be inspected by two different people. All of these decisions make a lot of sense, if your goal is to support FedEx’s old time slogan of “Absolutely, Positively overnight”. Yet, as more customers opt for slow-moving, cheaper delivery services, having all of this excess capacity becomes increasingly more expensive. As we discuss in our operations strategy class and the core operations course, firms have to continuously evaluate their competitive strategy and the alignment between the strategy and its operations, meaning its assets and processes. It seems that in its evaluation of the market conditions, FedEx realizes that in the years to come, downsizing its “express” side is the right move.
Some will argue that this is not a fundamental change:
What we have not seen is a fundamental shift from air back to sea,” Mr. Flynn said. “I just think it is going to be harder to take high-value, time-sensitive commodities off of an air carrier and onto a ship.” He agreed with Mr. Smith that there is an increasing opportunity for airfreight carriers to offer value-added services to customers, such as tracking capabilities.
Whether you believe the market for express air cargo is diminishing or just growing very slowly, and whether these changes are fundamental or temporal, it seems that everyone agrees that all firms will have to offer more comprehensive solutions or otherwise restructure their operations. In the comparison between UPS and FedEx the latter has been always the less integrated one, primarily due to historical reasons. Both firms have invested heavily in the last few years, in proving more logistical services to their customers. As the economy is bound the slowly improve over the next few years, the ability to quickly identify trends and capitalize on these will distinguish the winners from the losers.