Air Cargo Executives of the Year: FedEx’s Fred Smith & David Bronczek

In early April of this year, news broke from FedEx Corp. that raised a few eyebrows among cargo executives worldwide. The U.S.-based integrator had made a US$4.8 billion offer to buy struggling Dutch express firm TNT Express – the same TNT Express that was sought in a thwarted bid by arch-rival UPS, made just two years before.

Why would FedEx think it could succeed where UPS failed?

Eight months later, FedEx is moving forward with its plan to take over TNT’s extensive European road network, in what it is now being called one of the most significant mergers of 2015. The European Commission, which brought down the UPS deal on antitrust grounds, said it would issue “no Statement of Objections,” given that FedEx Express’ share of the European market is much smaller than that of UPS and could actually offer some welcome competition to the continent’s two powerhouses, UPS and DHL. In essence, it was a clear green light for FedEx.

The arc of the TNT deal, which is expected to be finalized in January 2016, is more evidence that the executive team of Fred Smith, founder, chairman, president and CEO of FedEx Corp., and David Bronczek, CEO of the company’s FedEx Express division, should never be underestimated for their business decisions. They have successfully weathered the storms of 2015, ending the calendar year with their company perhaps in the strongest financial health of its 44-year history.

“This has been the culmination of a lot of hard work,” Bronczek said. “It has been a terrific year. This is one of the ones that you put down in the record books.”

Need more convincing? At a time when FedEx was being chided for being late to the burgeoning logistics business and losing ground to the likes of UPS Supply Chain and DHL Global Forwarding, FedEx made two purchases in fiscal 2015 – cross-border e-commerce software firm Bongo International and third-party reverse logistics provider Genco – that could give it a distinct e-commerce advantage. While most airfreight carriers seemed to suffer from a global slump in trade, a drop in fuel surcharges and unfavorable currency exchange rates, FedEx Express reported a 45 percent spike in first-quarter operating income, year over year – the sharpest rise in the company’s history. And while so many other all-freight or combination carriers continue to struggle with labor issues, FedEx recently agreed to a six-year contract with its pilots’ union – just in time to avoid an awkward labor dispute before peak season.

“It’s hard to find anything not to like, it’s been a very gratifying year,” Smith said.

For their impressive performance, Air Cargo World has selected both Smith and Bronczek as the Air Cargo Executives of the Year for 2015.

 

A dynamite match

FedEx had always had a strong intercontinental presence in the European express market, Smith said, with robust traffic at its Paris hub, as well as at Stansted, Cologne, Frankfurt and Milan. But with the establishment of the European Union in 1993, new opportunities arose as tariffs and customs clearance barriers evaporated for road traffic, and Smith began to contemplate entry into a “pan-European surface express market.” The seeds were planted for the TNT deal.

 Bronczek, who began his FedEx career in 1976 as a courier and worked his way up the company ladder to run FedEx Express in Europe in the 1990s, also realized that the company “needed a little bit more size and scale and scope” in Europe to lower delivery costs. “Customers have always told us, gosh, you’re building out your [FedEx Trade Network], which is terrific. But we never had a big-enough ground network to complement it all in Europe. That was kind of the one missing piece to our portfolio.”

“We had made three smaller, country-specific acquisitions in the U.K., Poland and France,” Smith said. But he felt that there was a better opportunity with TNT, which FedEx had been observing for a few years.

TNT had built a large intra-European surface express network, centered on Arnheim and Liège. “That really allowed some unbelievable capability to pick up things in the U.K., and move them through their hub, deliver them overnight or in two days throughout the EU and down to Turkey,” Smith said. “We felt it was very complementary to what we do. Their strengths bolstered our position, and our strengths bolstered theirs.”

After Bronczek and Smith met with TNT’s leadership, things began progressing rapidly towards an agreement. The offer was made public on April 7. In early October, TNT shareholders overwhelmingly voted in favor of the merger. The only hiccup came in July, when the European Commission launched a Phase II investigation to ensure the deal would not adversely affect competition. But whereas the UPS/TNT venture would have held 30 percent of the market, a FedEx/TNT combination would only hold 17 percent, and on Oct. 20 the EC announced it would not object.

One of the reasons for the smooth progress (so far) has been FedEx Express’ familiarity with TNT’s corporate culture, Bronczek said. In the mid-1990s, when he was head of European operations for FedEx, he partnered with TNT on some projects in outlying areas around Europe. “I knew the people, I knew their culture – they’re culturally a good fit for us,” he said. “I knew what their strengths were.”

The similarity of culture also meant that FedEx would not have to struggle to create synergies between the companies or force massive layoffs, Smith said. “The vast majority of folks want to help us and not be a problem for us,” he said. “We’d been watching for a long time and we felt the opportunity was there.”

Embracing e-commerce challenges

Most of the air cargo and express industry’s attention at the moment is focused on the TNT acquisition, and rightly so. But two acquisitions FedEx made about a year ago – Genco for $1.4 billion and Bongo for $42 million – may end up having an even greater influence on FedEx’s success in the e-commerce arena.

Unlike rivals UPS and DHL, FedEx had not been heavily involved in the supply chain or contract logistics business, Smith said. Through its FedEx Trade Networks (FTN) subsidiary, launched in 2000, the integrator had focused on just the upper ends of the logistics world – “the critical inventory, the parts and pieces needed for factory shutdowns,” he said. The remainder, he explained, was mostly low-value-added work that many smaller companies could do less expensively than FedEx.

“Now, when e-commerce came along, it completely shifted everything,” Smith said. The focus moved from the front end, the supply side, to the back end, where consumers needed value-added services that online merchants weren’t prepared to provide. Last year, for example, an estimated 25 to 50 percent of all ecommerce purchases were returned, and Genco is the leader in this “reverse logistics” sector, providing services for seven of the top 10 North American retailers. “So we bought them, and it gave us an enormous portfolio of back-end things for the e-commerce world. All of our beliefs in the synergies and the market prospects of Genco have been reconfirmed in the period of time since we’ve owned it.”

The other half of the equation is Bongo, which began as a small Tampa-based software company that managed the vast patchwork of duties, taxes and other international regulations involved in the cross-border e-commerce business. In seconds, Bongo can figure out the costs and the terminology needed to ship an iPhone from, say, Singapore to Bulgaria, or Vietnam to Argentina.

Since purchasing the Bongo technology, FedEx has modified the software to be FedEx-compliant and scaled it up to be an integral part of the company’s value offering, Smith said. “It was a very small company but something we considered to have best-of-breed capabilities, which would take many months or years for us to develop ourselves,” he said.

FedEx expects to go to market with the expanded Bongo technologies sometime in 2016, which will help the company manage next year’s peak season. “We already have met with big e-commerce companies for next year’s Christmas peak and we haven’t even had this one yet,” Bronczek told Air Cargo World in October. “That’s how amazing that business is.”

Forward march

With the rise of e-commerce, FedEx decided it would be more cost-effective to buy rather than build its expertise to handle customer demand. On the logistics and customs brokerage side, however, the company has taken a more gradual, organic approach – one that has begun to bear fruit in the last few years, with the rapid growth of forwarding services in the FedEx Trade Networks division.

“I think the way we looked at it was not ‘we want to be in the freight forwarding business,’ it’s our customers who want us to handle things on the ocean as well as in the air,” Smith said. “And they want us to handle air cargo shipments – the heavier part of the shipment universe – as well as the door-to-door packages and freight pallets that we were handling.”

Years ago, FedEx had outsourced its customs brokerage business to Fritz Cos., but after Fritz was purchased by UPS in 2001, FedEx decided to take this business in house. While UPS Supply Chain Solutions and DHL Global Forwarding grew rapidly by purchasing several forwarding businesses, FedEx chose to build a logistics network from scratch.

“We bundle heavier airfreight shipments and seafreight, as well as the customs brokerage capabilities, and FedEx Trade Networks is enormous in that area,” Smith said. “It’s growing because they also sell our Express, Ground and Freight services as well. Hopefully it’s a two-plus-two-plus-two equals twelve situation.”

UPS and DHL still have much larger global logistics networks, but FedEx today offers forwarding services to 95 percent of the world’s GDP, Bronzcek said. “Just a few years back we only had 40 or 50 [FTN] office sites around the world. Now we have 140 in 27 countries.”

Profits improved

High-end logistics software has become so critical to moving intercontinental airfreight that it can be easy to forget the human element involved in the process. This is not the case for Dave Bronczek. When asked about the accomplishment he was most proud of in 2015, he immediately mentioned the labor agreement signed between FedEx Express and the Air Line Pilots Association in October. “Labor peace is very important to us,” he said.

The six-year contract – the longest such labor agreement FedEx has ever signed – has been in the works since 2011, with formal bargaining starting in 2013. FedEx’s pilots, Bronczek said, have gained improvements for retirement and healthcare benefits, plus enhanced new-hire compensation and a signing bonus.

“I’m very gratified because when you look around the world, a lot of unions are rejecting the airlines’ contracts,” he said. This year alone has seen labor strife at UPS, Delta, Southwest, Cargolux, Lufthansa and Air France-KLM, just to name a few.

The pilots’ contract can also be seen as an offshoot of FedEx’s three-year “profit improvement plan” that began in fiscal 2013 and has been in place for the last 10 consecutive quarters. The goal of the plan – which involves a streamlining of processes, a fleet realignment and a reduction in costs, including a voluntary buyout and early retirement plan for some redundant staff – is expected to boost net revenues for the company by $1.6 billion by the end of fiscal 2016. By May 31 this year, at the end of fiscal 2015, Bronczek said FedEx had already reached 75 percent of the goal it had announced under the profit improvement plan.

A major part of the improvement plan was executed in July this year when FedEx moved forward on the next step of its long-running fleet modernization plan, with an order for 50 additional new-build 767 freighters from Boeing, bringing its 767 order to a total of 100 freighters. The 767s, of which FedEx has now taken delivery of 24, are being used to replace the integrator’s aging fleet of A300s, A310s, MD-10-10s and MD-10-30s, Smith said.

In fact, the fleet optimization program began before the official profit improvement plan, when FedEx purchased 757s to replace the carrier’s old 727s, as well as 777s to replace DC-10s. But today, the new aircraft – which will only replace older planes not add more net capacity – are a major part of FedEx’s strategy to reduce both fuel consumption and carbon emissions.

“These planes are 30 percent more fuel efficient,” Bronczek said. “They’re obviously much, much more reliable.” In his role as a former IATA Chairman a few years ago, he made a commitment to the 2020 carbon neutral program. “The fleet modernization programs around the world certainly contributed to that, and that’s certainly been the case at FedEx Express.”

FedEx of the Future

At the moment, Job No. 1 at FedEx is ensuring the final integration of TNT and FedEx Express, Bronczek said. “We want to make sure we focus on it – get it right. We’ve done acquisitions around the world in Brazil, China, India, Poland, France, U.K., but nothing like this one. So for now, we have all hands on deck to make this seamless for our customers.”

Some of the final, and more tedious, hurdles that remain are to get approval from the various countries in which FedEx and TNT curently operate, Smith added. “For instance, TNT orginated in Australia, so we had to get Australian clearance. And China clearance, and Brazil clearance – and, for that matter, U.S. clearance.” Also, because FedEx is a U.S. company, it is prohibited from owning a European airline, so TNT is also in the process of finding a European buyer for its airline subsidiary.

But the rest of its business can’t be put on a shelf while the TNT integration takes place. FedEx is expecting its peak-season volume to grow by 12.5 percent over last year, which would represent the company’s fifth consecutive record-high peak season since the Great Recession ended. Which is another reason Bronczek said he is relieved to have the labor contract resolved in advance. “Weneed to have pilots available to volunteer for extra routes during peak,” he said. “If we didn’t, I think there’s a possibility that we wouldn’t have had as much flexibility. “

Farther down the road, Bronczek acknowledges that growth for the express business is in the explosion of e-commerce logistics. Companies like Amazon and Alibaba represent another frontier of e-commerce, especially the new global logistics networks being planned, such as Alibaba’s Cainiao consortium. “You listen to the growth rate projections for some of these companies, like Amazon, they’re astronomical,” he said. “We just want to make sure we have our business opportunities with them, and so we’re working on that.”

For now, FedEx Express is happy to be a shipping option for companies such as Amazon, Walmart.com and Target.com. “I know there are a lot of reports that say these are our enemies or our competition,” Bronczek said. “Certainly there’s some competition, but they’re also partners. It’s sort of like the U.S. Postal Service. We partner with them, and at the same time, we compete in some sectors with them.”

But until the express network wars start heating up, Bronczek and Smith say they plan to use the year they experienced in 2015 as a blueprint to continue FedEx on a path toward higher profitability and growth. “Like so many things in life, once you get momentum, like we have, it carries you a long way,” Bronczek said. “I feel very good about what’s happened and where we are, and actually more excited about where we’re going.”

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