(10/20/08)
FedEx is sometimes referred to as a bellwether for the U.S. economy. The bellwether appears to be doing OK, based on the quarterly financials which FedEx released today.
Revenues increased, but earnings decreased 22% over a year ago. For fiscal year 2009, FedEx expects to earn $4.75 to $5.25 per share, up from $3.64 for fiscal year 2008. Daily volume in FedEx’s Express and Ground segments increased 1%, helped by growth in ground, FedEx SmartPost and international domestic express shipments. U.S. domestic package volume fell 5%.
The key to FedEx’s future is continued improvements in efficiency. Customers look to FedEx to handle shipment, logistics and delivery better than competitive alternatives. One challenge for FedEx is controlling fuel costs including jet fuel, diesel and gasoline. All these fuels are refined from oil. So when oil prices again increase, FedEx must minimize the impact.
In fiscal year 2008, FedEx consumed 1,227,290,000 gallons of jet fuel – yes, over one billion gallons – delivering 7.5 million packages daily by air and ground. In Q1 08, jet fuel cost $2.295/gal; in the latest quarter, cost $4.058/gal. FedEx’s total jet fuel cost increased 76% over the same quarter of the previous fiscal year. By being more efficient, however, FedEx reduced gallons of jet fuel used from 310,794,000 in Q1 08 to 294,724,000 in Q1 09, a five percent reduction. FedEx is beginning to upgrade its air fleet by replacing Boeing 727 planes with 757 that reduces fuel consumption 36 percent while providing 20 percent more capacity.
During my recent visit to the FedEx Express Super Hub in Oakland, I witnessed efficiency in reducing jet fuel and many other improvements in operations. Through this hub, 250,000 packages are received, sorted, and then put on planes or trucks moving them towards their delivery destinations. Packages of every shape and size moved through conveyors of the massive center, being routed left and right, up and down, based on bar code information. A small package with a Teddy Bear for Alicia is routed left continues its journey to Atlanta. A thousand pound container of just-in-time electronic components from Taiwan continues its journey to the manufacturer in San Jose.
Robin Van Galder, Managing Director of the Oakland Operations, took me on a tour of the 60 acre facility that might handle 50 planes and 200 trucks on a given day. With 1,400 employees, I was surprised that he was greeting everyone by name. This hub is part of FedEx’s growth including Asia Pacific, as more goods move to and from Asia, by plane including Oakland and San Francisco and by the ships in major West Coast ports such as Los Angeles, Long Beach and Oakland. Everything is in motion, as large containers are unloaded, packages routed, containers reloaded, planes and long-haul trucks filled.
In the future, more packages will be automatically sorted with less human oversight needed as containers embed RFID chips containing more information than bar code. RFID readers were present and sometimes used during my tour.
Each day some 50 planes land, unload, reload, and then depart the FedEx hub which is located within the Oakland International Airport complex. More efficient Boeing 727-200s have replaced 727-100s. Larger MD11s also use the hub. This July, FedEx flew its first 757. Between 2010 and 2012, fifteen Boeing 777 will be added to FedEx’s fleet, further improving fuel efficiency and plane cargo capacity.
As soon as planes dock for unloading and loading, their engines are shut off to save fuel. Auxiliary power is handled with auxiliary electric power provided by hubs such as Oakland. This approach at multiple facilities saves FedEx one million gallons of jet fuel per month. Commercial airlines would do well to follow this example.
The facility uses a few light-electric vehicles. Tugs, now running on diesel or propane, may eventually be replaced with electric tugs. Forklifts now running on propane, my eventually be replaced with electric forklifts.
904 kW of electricity is provided by the solar panels covering the roof. Solar and hybrid delivery trucks are important parts of FedEx’s increased efficiency. Solar is used at this and other California facilities. When the new FedEx hub in Cologne, Germany, is online, FedEx will have almost 3 MW of solar installed. Geothermal power is also used in Geneva.
When I talked with Mitch Jackson, director of Environmental Affairs and Sustainability at FedEx, he explained that FedEx now has 172 hybrid delivery trucks. The hybrid trucks improve fuel economy 42 percent, reduce greenhouse gas emissions approximately 30 percent and cut particulate pollution 96 percent.
FedEx constant works at deploying the right sized vehicle for the appropriate application. Larger vans make sense in cities with 50 to 100 deliveries within a few miles. Lighter vans which use less fuel per mile, such as Sprinter, are used when there are lots of miles spread over suburban and rural routes.
The FedEx Hub also demonstrated FedEx’s growing relationship with the U.S. Postal Service. At Oakland, 15,000 bags of U.S. mail are sorted and continued on their way. FedEx SmartPost is one of the growing parts of FedEx’s business. It helps businesses control cost and speed delivery by handling pickup, sorting and staging, with delivery to the most efficient points in the postal system for final delivery to homes and businesses.
Should fuel costs continue to rise, FedEx might explore a strategic relationship with rail carriers which can move bulk goods less expensively and with less fuel, but with days added to final delivery. Currently, FedEx Trade Networks North American Transportation services can handle a wide range of end-to-end logistics for a customer including intermodal services that include rail.
Beyond its own operations, FedEx states that fuel savings “starts with a holistic examination of a customer’s supply chain. FedEx frequently works with customers to analyze and reconfigure their supply chains to enhance efficiencies and reduce customers’ overall environmental footprint.”
To keep transportation cost and fuel use under control, continued efficiency improvements will be strategic for FedEx and its customers.
