Wall Street Journal
Jennifer Levitz
July 14, 2010

777s To Deliver An Edge...

At a brainstorming session several years ago, FedEx Corp. Chairman and Chief Executive Frederick W. Smith and his counterpart at Boeing Co. used a napkin to sketch a cargo version of the aircraft maker's 777 passenger jet.

Today Mr. Smith, who launched the overnight-delivery business when he founded FedEx in 1971, says the plane that emerged from those talks is crucial to his company's recovery from the recession.

FedEx hopes to use its growing fleet of long-range 777s to win business from competitors like United Parcel Service Inc. in the lucrative market for international package delivery, and to cater to the rising middle classes in India, China, and Brazil, which Mr. Smith says increasingly want the latest product delivered to their door within a day or two.

"It's quite a machine," the 66-year-old former Marine pilot says of the Boeing "triple seven," the largest, twin-engine plane on the market. "It's given us a whole new dimension into what we can do," he adds.

The aircraft can carry 178,000 pounds at long distances and has a range of 6,675 miles, about 14,000 pounds and over 2,100 miles more than the MD-11, which has been Fed-Ex's chief long-haul freighter.

FedEx, which won't disclose what it is paying for the planes, took delivery of its first six 777s in September, and expects to add six more to its fleet over the next 12 months. It plans to spend $3.2 billion overall on planes, new sorting centers, and other improvements in the fiscal year ending May 31, 2011, up from $2.8 billion a year earlier.

The 777s are coming into service as FedEx and UPS are seeing new life in the overseas-shipping business. FedEx's international loads are at their highest since 2000, Mr. Smith says. Shipments by air are rising, as companies that slashed their inventories during the recession are scrambling to rebuild them and avoid leaving customers in the lurch.

That's where the 777 comes in. The plane can fly between major cities in the U.S. and Asia without stopping to refuel in Anchorage, Alaska, where FedEx has a hub. Because they don't need to stop for fuel, the 777 can make the trip one to three hours faster than the MD-11.

FedEx says the time savings allows it to give its Asian customers, who air-freight products ranging from electronics to toys to apparel, two extra hours a day to manufacture their goods and still get them shipped out for next-day delivery. The company calls the planes a "game changer.

Its leading rival is skeptical of that claim. "We don't believe it's a game changer," says UPS spokesman Norman Black. "If we see any material change in competitive pick up times, we have ways of adjusting our own network to address that."

Mr. Black says FedEx is spending more on new planes than is UPS, whose main long-haul freighters are the Boeing 747-400 and MD-11.

FedEx and UPS play a huge role in global commerce, together carrying roughly 10% of the U.S. gross domestic product and 3.5% of global gross domestic product at any given time, based on their own estimates. That's why the two companies tend to be among the first to spot a downturn or turnaround.

In the fiscal fourth quarter ended May 31, revenue from FedEx Express, which delivers world-wide by a definite date and hour, and accounts for the bulk of FedEx's revenue, grew by 23% after falling 24% a year earlier. FedEx added a ninth scheduled daily U.S.-Asia flight in April, and a third between Asia and Europe.

Its average daily volume of packages shipped across the Atlantic or Pacific rose 23% in the quarter led by a 41% increase in exports from Asia, while the express unit's U.S. volume rose 1%. "That's why we have a relative degree of optimism, perhaps not shared by others. If they're just hooked into the local economy, they may not share that general optimism," Mr. Smith said.

While he is generally upbeat about FedEx's global business, Mr. Smith is less enthusiastic about the U.S. economy, though he doesn't expect a double-dip recession. "I think the likelihood of that is low, but I think the greater likelihood is that the United States will have tepid growth," he says.

Still, he is more confident than in December 2008, when said FedEx faced the worst economic conditions in its history. In response, FedEx lowered its cost structure, cutting $3 billion in expenses in fiscal years 2009 and 2010. "Pilots flew fewer flight hours, the mechanics had fewer hours, and pick up and delivery people, [sorters], and so forth," Mr. Smith says. Senior officers, including Mr. Smith, took pay cuts, and the company froze 401(k) matches.

Since then, FedEx has restored some flight hours and retirement-plan benefits. Still, about $1.5 billion of the austerity measures remain in place, including Mr. Smith's pay cut.

Even with global demand improving, Mr. Smith concedes that his company's investment in the new 777s is an aggressive one. By the end of fiscal 2016, the company plans to have 31 777s in its fleet.

But he says, the new planes' fuel efficiency-they consume 18% less fuel than an MD-11-would be an advantage even if business turned lower. "If we're wrong, the only thing we have to do is put an MD-11 on the ground," he says. "The secret of this business is you've got to have a defensive strategy, as well as an offensive strategy."

Wall Street Journal
Jennifer Levitz
July 14, 2010