Building the network for what’s next
To our shareowners,
In last year’s letter,
I described fiscal year 2019 as a year of challenge and change with more to come in fiscal year 2020,
as was certainly the case — especially with the emergence of COVID-19. When I discussed confronting challenges and embracing opportunities in last year’s letter,
I covered three enormously consequential developments for FedEx,
which all merit reiterating:
- Trade disputes that began in calendar year 2018 and accelerated in calendar year 2019;
- Strategic decision-making to position FedEx as the dominant e-commerce player; and
- Strategically timed aircraft and hub modernization programs.
Challenge &
change — trade disputes:
Trade is an essential element of prosperity. Arguably one of the biggest changes that has increased prosperity since the end of World War II has been the opening of global markets and the growth of trade. FedEx serves more than 220 countries and territories,
making us an enormous enabler and beneficiary of free trade,
and as we finished fiscal year 2018,
FedEx experienced one of the strongest quarters in the company’s history.
As illustrated in the below chart, in calendar year 2018 the trade disputes dealt a devastating blow to the global industrial economy, which is very much dependent on global trade. Our company’s commercial business suffered across the board as the trade disputes escalated. We were most adversely affected in Europe, where we were in the midst of the integration of TNT. FedEx was among the first to recognize this slowdown in global trade, and we responded to this challenge by actively managing costs while continuing to make the necessary investments for long-term success.
GLOBAL TRADE VOLUME VS GLOBAL INDUSTRIAL PRODUCTION
YOY % Change
Sources: Netherlands Bureau for Economic Policy Analysis and Haver Analytics
As of May 1,
2020
Challenge &
change — going all-in on e-commerce:
Second, by the end of fiscal year 2019, our Strategic Management Committee had made some of the most significant decisions in the history of FedEx — representing an enormous shift in direction. FedEx has a history of seeing what lies on the horizon, and we determined to go all-in on e-commerce. Given the overwhelming opportunity in the booming e-commerce market, we acted decisively to position FedEx to become the market leader.
To that end,
we announced in late fiscal year 2019 significant transformation of our e-commerce capabilities at FedEx Ground including:
- Extending residential deliveries to seven days per week year-round;
- Rapidly integrating FedEx SmartPost volume into standard operations — we’re now taking back packages previously given to the U.S. Postal Service to increase delivery density and improve the efficiency of last-mile operations; and
- Building out capabilities to more easily handle an increase in large items ordered online, such as furniture, rugs, and exercise equipment.
During the same timeframe, we decided to end our largest Amazon contracts to focus on the broader e-commerce market. It was the correct decision to end these contracts — which were not long-term in nature and were declining in profitability — and train our eye on the larger e-commerce market.
While the Amazon volume represented only a small portion of FedEx revenue, the last bit of volume has significant flow-through to the bottom line. FedEx was adversely affected; however, we have closed additional business to replace this volume and have taken out costs related to Amazon’s requirements.
Challenge &
change — aircraft and hub modernization:
The third element of challenge and change FedEx continues to address is the modernization of our air fleet and primary hubs. The expensing provision of the Tax Cuts and Jobs Act signed in December 2017 encouraged FedEx to order additional Boeing 777F and 767F aircraft. The pro-growth incentives in the law made fiscal year 2019 the optimum time to make these purchases and retire more of our less efficient aircraft. We’ve successfully retired all of our A310 aircraft,
and we expect to retire all of our MD-10 fleet by the end of fiscal year 2022.
The law’s incentives also encouraged our future-focused hub modernization efforts, specifically our $1.5 billion expansion of the FedEx Express Indianapolis hub and a $1.5 billion modernization of the FedEx Express Memphis World Hub — both multi-year projects.
While some of the above strategies created financial headwinds in the short term, we’re confident we will point to these decisions as inflection points as we drive significant earnings growth and improvements for our shareholders and customers alike over the long term.
Who we are and what we do — responding to the COVID-19 pandemic:
While we were heading off existing challenges and positioning our company to leverage future opportunities, a new challenge emerged in January 2020 unlike anything we could have predicted. We confronted COVID-19 initially in China,
where we took herculean steps to protect the safety of our team members. As the virus spread throughout the globe, the safety of our team and our customers remained our absolute first priority.
My most sincere appreciation goes to teams across FedEx — both those working resolutely behind the scenes and our frontline team members — whose efforts combined to keep the world’s health care, industrial,
and at-home supply chains moving in a truly historic way.
Our Global Network Planning and Operations Control teams adjust our network to maximize capacity and utilization, at times on a daily basis. We are peerless in our ability to move aircraft around the world to match capacity to demand. As just one example of how we’ve kept commerce moving despite challenges, in early March when passenger-plane belly capacity was severely constrained, FedEx flew nearly 250 flights in and out of China in one week — in line with our flight schedule prior to the pandemic. We also flew a total of 530 extra flights in the fourth quarter of fiscal year 2020, on top of our base schedule — undertaking one of the largest airlifts since the Berlin Airlift of 1948 and putting who we are and what we do on display for the world. While impossible to capture the breadth of our ongoing efforts in one letter, below are several illustrations of how we’ve mobilized the incredible reach and flexibility of our networks and the commitment of our FedEx team members to respond to the pandemic:
- FedEx Express has globally transported more than 36 kilotons of personal protective equipment since February 1,
2020,
including approximately 1.5 billion masks
- FedEx Express stood up a special weekend operation — quickly adding 28 flight legs — to help the U.S. government move COVID-19 test specimens from more than 50 remote drive-through testing centers across 12 states.
- FedEx Ground quickly ramped up its operation to manage peak-like e-commerce volumes to support U.S. customers as they stay home and shop online in support of social distancing.
- FedEx Logistics has orchestrated more than 100 charter flights and 1, 000 ocean containers to supply critical personal protective equipment.
- FedEx Cares has facilitated the transport of more than 7, 300 humanitarian aid shipments globally through collaborations with our nonprofit partners — including personal protective equipment, medical shelters, boxes for food banks and more.
Future-ready strategies:
And while our strategic course at FedEx was plotted long before COVID-19 entered the picture,
in many ways,
the world accelerated to meet our existing strategy. The e-commerce growth we anticipated over a few years happened in a matter of a few months,
with e-commerce as a percentage of the U.S. retail market increasing from 16% in calendar year 2019 to 27% in April 2020. This growth underscored the importance of our business initiatives that directly address the e-commerce market’s inherent challenges,
including FedEx Ground seven-day operations,
in-home deliveries of large,
bulky items through FedEx Freight Direct,
and integration of SmartPost volume to increase density.
The flexibility and automation of the FedEx Ground network made it possible to react quickly to challenges faced by e-commerce shippers due to inventory imbalances and an increase in fulfillment from store. Additionally,
the network-wide rollout of Dynamic Route Optimization technology — which gives service providers near-real-time data to plan the best routes and respond to local market trends — has continued throughout the pandemic and will be completed prior to the peak holiday shopping season of 2020. The strategic steps we are taking to manage yields and improve efficiency in our operations,
specifically the last mile,
will position FedEx Ground for sustainable,
industry-leading margins.
To make costly last-mile deliveries more efficient,
we’re also continuing successful collaborations like Last Mile Optimization — now launched in 57 origin markets. To put the right package in the right network at the right cost to serve our customers,
FedEx Express is contracting with FedEx Ground for the transport and delivery of select day-definite residential Express shipments. These are just a few of the future-ready strategies we’re employing on the way to becoming the most successful North American package delivery company.
Building the network for what’s next:
As depicted in the above chart,
COVID-19 obviously adds uncertainties to an already tenuous global landscape given the trade disputes and the slowing industrial economy. Despite these external factors over which we have little control,
we have enormous cause for optimism. We’ve shown our mettle amid a global crisis,
and the world will continue to look to FedEx to deliver critical cargo. We are continuing to make progress on the integration of TNT,
which will strengthen our global network capabilities for our customers.
On top of the world’s most dynamic and omnipresent physical network,
FedEx also has incredible data and insight. In May 2020,
we announced a new multiyear collaboration with Microsoft to help transform commerce by combining the global digital and logistics network of FedEx with the power of Microsoft’s intelligent cloud. Our first joint solution,
FedEx Surround,
will provide customers near-real-time insights — down to ZIP code,
for example — to shine a digital light on the movement of physical inventory.
Furthermore,
we have launched SenseAware ID,
our next generation sensor-based logistics device that provides real-time tracking of a package location while it’s in the FedEx Express network using Bluetooth Low Energy. Initially,
SenseAware ID will be limited to U.S. domestic FedEx First Overnight packages and will roll out nationwide by September 2020. This will provide competitive differentiation on our most premium services,
and via FedEx Surround will allow for greater visibility,
actionability and reliability on these shipments.
We believe blockchain and its insight into an authentic chain of custody will completely change worldwide supply chains. We continue to lead in exploring use cases across global customs clearance,
health care and aerospace that have the potential to disrupt our industry for the better.
We’re preparing Roxo,
the FedEx On Demand Bot,
for a second round of testing after last year’s initial on-road tests and are making progress on legislation and regulatory approvals. There is much discussion of how autonomous robots like ours could help within a global pandemic like COVID-19,
and we’ll come out of this pandemic with a greater understanding of how FedEx can benefit customers — and society — through these devices.
You can expect us to continue to lead through technology and boost our capabilities at the intersection of the digital and physical world to position FedEx — an original market disruptor — to disrupt the market again.
Of course,
none of these achievements would be possible without our FedEx team. I want to thank our Chief Financial Officer Alan Graf in particular,
who is retiring from the company in December. Alan has been part of every significant decision over his 40 years of service at FedEx and has helped navigate tremendous growth,
strategic investments,
game-changing acquisitions and global challenges. FedEx would not be the $69 billion globally admired corporation we are today without his leadership. Additionally,
I would like to share my most sincere appreciation with John Edwardson,
who is retiring from the FedEx Board of Directors,
for his wise counsel and 17 years of service.
I am also extremely grateful for the commitment of each of our more than 500,
000 team members around the world who deliver every day on the Purple Promise to make every FedEx experience outstanding. FedEx is the network for what’s next,
and we have the backing of the sharpest team in the business.
FREDERICK W. SMITH
Chairman of the Board and CEO
See the “Risk Factors” and “Forward-Looking Statements” sections of the fiscal 2020 FedEx Corporation Annual Report on Form 10-K for a discussion of potential risks and uncertainties that could materially affect our future performance.