Managerial Econ FedEx Is a Logistics Company

Managerial Econ

FedEx is a logistics company that "provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services." The company offers "integrated business applications through operating companies competing collectively and managed collaboratively" (FedEx.com, 2013). The company has a number of different units, including Express, Ground, Office, Customs Critical and other smaller businesses related to its core delivery businesses. The company has experienced a long-term rising trend in its revenues, mostly tied to the business cycle, but its net income has been more volatile over the past five years (MSN Moneycentral, 2013). FedEx has long been considered to be a bellwether firm for the economy, since it has a diversified corporate customer base and its stock price closely tracks industrial output (Goldstein, 2013).

Pattern of Change

FedEx has a relatively slow pace of change. The core technologies of the logistics business are transportation equipment, which has long-term business cycles. Its truck fleet is relatively old with minimal upgrades in technology. Today, Airbus and Boeing have recently introduced the first advancements in cargo aircraft in a couple of decades, for example the Dreamlifter (Poechlauer & Vyeson, 2008). The company's use of technology to keep its remote staff in contact with dispatch contributes to the ability of FedEx to provide tracking updates up to every five minutes, a customer service competitive advantage. This technology was introduced just prior to the smartphone revolution so it was revolutionary for the business at the time but now lags conventional consumer technology, necessitating new investments in innovation. But largely, the innovation cycle in the industry is long.

The operating environment is global, and economies of scale pose a significant barrier to entry. Some regional players are relatively large, but for the most part the competition in the industry has a long time frame with four main companies. Revenues are closely tied with the business cycle. Rivals TNT and DHL are more tied to the European business cycle, while FedEx and UPS are more tied to the American business cycle. Goldstein (2013) noted the connection between the FedEx stock price and U.S. industrial output, for example. There have been factors that cause FedEx to deviate, however. One factor is international growth, and as foreign revenues in places like China increase the company is likely to see its correlation with the American business cycle decline. At this point, however, a lot of the traffic even overseas is between those destinations and the U.S., rather than within those destinations. Certain customers have been able to drive FedEx revenues away from tight correlation with the market, in particular Apple, whose recent run went against the market, helping FedEx buck the recession at least a little bit.

Behaviors

The industry has oligopoly characteristics. FedEx and UPS dominate much of the business, and together have all but forced the other companies out. The USPS is a perennial money-loser, its ongoing presence in shipping packages only facilitated by federal funding -- a free market player with its financials would have folded years ago. German competitor DHL all but exited the industry in 2008, only to attempt a return in 2011 focusing on shipments between the U.S. And Europe (Doss & Credeur, 2011). The DHL story highlights interesting market behavior. The company felt it could not turn a profit in the U.S., so it began to dramatically scale back operations. What it found, however, was that exit costs were higher than anticipated -- it was losing customers back home because it had reduced its ability to get their packages to the U.S. since the U.S. market is critical to success in the global freight business. With high exit costs, the company realized it had to get back into the market and try to do so profitably.

The competition remains, however, largely a duopoly, and market characteristics support that. FedEx and UPS typically price against each other. They matched DHL's prices, too, which had caused the firms in the industry to veer towards a destructive price war. With just two firms, they have been matching prices but at a level where there is ample profit for both, without colluding, in the same way that Pepsi and Coke do.

Competitiveness

For firms in this industry to be competitive, they need to do high volumes of business. There are high fixed costs associated with running the routes, especially the aircraft. So if FedEx is sending an airplane from its west coast hub in Oakland up to Vancouver, it needs to make sure that plane is an full as possible, getting past the breakeven point to generate contribution. This can mean that on some routes an aircraft might make multiple stops. But the important factor is that the business relies on high volumes, so the pricing strategy has to reflect that, while at the same time ensuring a contribution margin. So contribution margin is a key measure. Load capacity is closely related, but reflects only the volume of goods and not the amount of revenue that is generated from these goods. Another key metric is contribution per package. This measures the contribution to fixed costs per package, so evaluated on the basis of per-package pricing and the total volume of packages. The higher this figure, the better the profits will be. All of these key performance metrics point to one thing- that pricing policy needs to reflect a balance between doing volume and doing it at a level that is profitable. As such, the industry can be expected to have tight margins. In a down market such as 2008, margins can be very slim as load factors are depressed. With just two competitors in the industry today, margins are higher as the firms avoid destructive duopoly price wars, so margins are starting to increase again.