FedEx is pushing to grab a chunk of the third-party air cargo market worth a whopping $80 billion!
First off, FedEx is taking advantage of a huge change: the expiration of its contract with the U.S. Postal Service. For years, FedEx had to dedicate a ton of its resources to flying mail for the Postal Service. They had more than 100 freighter aircraft doing all sorts of daytime flights across the U.S. just to handle this contract. But when the Postal Service handed over the reins to UPS earlier this year, FedEx suddenly found itself with a lot more freedom to make changes.
The Postal Service deal wasn’t exactly a money-maker for FedEx. It was pretty unprofitable and caused them to spread themselves too thin, committing more planes and infrastructure than necessary. But with the contract gone, FedEx has been able to scale back and adjust its air network to better serve its other markets. According to FedEx CEO Raj Subramaniam, they’re “strategically matching capacity with demand,” meaning they can now transport packages more efficiently without the Postal Service’s demands taking up all their resources.
FedEx is now focusing on a segment of the air cargo business that’s ripe for disruption: the international airfreight market. Traditionally, international airfreight is booked by logistics companies on commercial airlines, but FedEx is looking to tap into this more actively.
FedEx has been working on a new strategy called “Tricolor,” which is about streamlining its air network. The idea is to separate their aircraft by different product categories to make sure each plane is used as efficiently as possible. This plan is part of a larger effort to cut down on costs by $6.2 billion.
For more context, FedEx had traditionally transported third-party shipments as a by-product of their overnight parcel network, but now they’ve created a dedicated service for larger, bulkier cargo. This is where the opportunity lies for them. Instead of letting other operators like Atlas Air or Cargolux take all the big, heavy shipments, they’re shifting gears and working to capture a larger share of this deferred cargo business, which typically involves items like electronics, automotive parts, and even perishables.
FedEx’s Chief Customer Officer, Brie Carere, made it clear during their earnings call that they see a huge growth opportunity here. She even said, “The airfreight market is fragmented and the shipping processes are antiquated. It’s a market ripe for disruption.”
One of the main ways they’re doing this is by investing heavily in technology and customer service. They’ve set up a new sales team specifically for this new cargo business, along with a new customer service model. They’re also pumping money into digital tools to make it easier for customers to track their shipments and book services.
Another part of the Tricolor strategy involves rethinking how they use their fleet. They’re dedicating specific aircraft to different types of cargo, with a particular focus on international shipments. The idea is to have dedicated aircraft for high-priority parcels and separate planes for deferred shipments, like pharmaceuticals, perishables, and automotive parts. These deferred shipments are often lower-priority, but they’re still highly profitable per pound.
This change in approach is already showing signs of success. Even though they’ve been scaling down their fleet size due to slower parcel demand, FedEx is seeing an increase in daily cargo and yields for their international freight. They’re making better use of their aircraft, and this is helping them generate higher profits.
FedEx’s financial officer, John Dietrich, mentioned that the Tricolor strategy had a positive impact on their international freight product in their most recent financial quarter. And with air cargo demand growing globally, FedEx is in a prime position to ride this wave of increased demand.
By leveraging their expertise and resources, Lading Logistics aims to provide efficient and reliable international shipping and logistics solutions for their clients.
