FedEx stays the course in Europe, despite pending UPS-TNT deal
CEO Fred Smith says FedEx has a profitable multi-billion dollar business in Europe and it is growing strongly.
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When UPS announced earlier this week, it had reached an agreement in which UPS will acquire TNT Express for roughly $6.77 billion ($5.16 billion euro), the general consensus was that it is a boon for the company and will significantly strengthen its European presence.
And many analysts added that it will also hinder the European prospects of its biggest competitor, FedEx, too, with European market share post the UPS acquisition of TNT—the deal expected to be completed in the third quarter—pegged between 3-to-10 percent.
When the deal becomes official, it drops the number of global express players down to three—UPS/TNT, DHL, and FedEx—and it also puts DHL and FedEx at a tremendous disadvantage in the U.S. and Europe, respectively, said Jerry Hempstead, principal of Hempstead Consulting, in a recent interview.
“The deal makes UPS the largest carrier by far in Europe and makes FedEx the weak sister in that turf,” he said. “FedEx had less than 10 percent of the European market and the size and critical mass of TNT/UPS and that of DHL will make it almost impossible for FedEx to have a critical mass to allow it to have low enough operating cost to be a significant player.”
But there are also headwinds to consider, too, such as the weak state of the European economy and the potential difficulties that could occur when the actual UPS-TNT integration begins in earnest.
In a research note, David Ross, Stifel Nicolaus analyst, pointed out that while his firm believes the UPS-TNT deal to be a long-term strategic win for UPS, the integration challenges should not be overlooked, as network integrations rarely, if ever, go as planned (e.g., DHL’s U.S. parcel hubs and Yellow/Roadway in LTL).
Ross pegged the combined UPS/TNT entity having an estimated 25 percent-30 percent market share of the European small package market, which will make it the #1 player but unlikely large enough, in Stifel’s view, to have the deal blocked for anti-trust reasons.
On its fiscal third quarter earnings call today, FedEx Chairman, President, and CEO Fred Smith said that over the years there have been lots of rumors regarding possible acquisition candidates for TNT that have surfaced periodically, and FedEx has consistently declined to comment on them. The company’s policy in this regard to corporate development activities remains unchanged, he said.
“FedEx Express has a profitable multi-billion dollar business in Europe, and it is growing strongly,” said Smith. “I am extremely pleased with our operations there and very confident in our plans to continue expansion, primarily through organic growth. We believe these plans will continue to improve our competitiveness in Europe and further continue to contribute to profitable international growth.”
What’s more, Smith noted that even though FedEx is doing well there, growth rates in Europe are extremely low and are likely to continue to remain low as long as the policies being pursued in Europe remain the same as they have for the last 20-to-25 years, as well as in the U.S. These policies, he said, are not stimulative for GDP growth, aside from relatively low levels.
And unlike the U.S., Smith said Europe is a fractionated market, with domestic markets that are historical there that have a number of competitors, as well as the Pan-European surface market, the Pan-European air express market, and the intra-continental business in Europe, in which FedEx is very strong, coupled with selective participation in the domestic European marketplace, which is part of the company’s organic expansion plan within Europe.
“For several years now we have actually been working on more intercontinental flights from Asia to Europe and flights from the U.S. to Dubai and the Middle East,” said Dave Bronczek, president and CEO of FedEx Express on the earnings call. “Just in the last five months we have opened 23 stations in Germany, France, Spain, Italy, and Sweden, among others, and have added more jets and city points inside the European network. We are growing and are profitable and adding later pickup times to access the European market into the global market with much earlier deliveries. We are very optimistic and forward-thinking about our future in Europe.”
But should growth flatten for FedEx in Europe down the road, Hempstead said that what could ail the deficiency of FedEx in Europe and the DHL lack of a domestic solution in the USA is some sort of marriage of FedEx and DHL.
About the AuthorJeff Berman, Group News Editor Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman
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