FedEx Express is the world’s leading express delivery company. Founded in 1971 as Federal Express, the company has experienced outsized returns and growth since its inception, with a quarterly dividend and a 63% increase in share price in the last five years alone.(1) This success is directly attributable to the highly effective alignment between FedEx’s strategy and customer promise of rapid delivery and its highly automated and synchronized operating model, specifically within its major subsidiary, FedEx Express. FedEx serves as an excellent example of how executing a successful operating model is crucial to creating and capturing value.
FedEx creates value by offering “high-value added” package delivery to over 220 countries. (2) The business model can best be summed-up in the company’s early slogan: When it absolutely, positively has to be there overnight. (3) With 652 aircraft (the world’s largest freight airline) moving over 4 million packages per day, FedEx guarantees speed with a reliability of greater than 99% (4). Very few companies can make such a claim, and FedEx is able to capture value by consistently delivering on this promise to its customers.
Any company could transport one package via aircraft from point A to point B quickly, but this is prohibitively costly without economies of scale. To deliver on its customer promise of rapid and reliable delivery while offering competitive pricing, FedEx Express relies on an extremely efficient operating model that is centered on its aircraft (Figure 1) (5). FedEx is colloquially known as an airline that owns trucks, unlike its nearest competitor UPS, a trucking company that owns airplanes.
While FedEx Express has the largest freight airline in the world, these aircraft do not fly direct. Instead, all aircraft pass through one of FedEx’s 14 major hubs placed strategically around the globe (Figure 2, illustrated in purple). (6)
Instead of aircraft taking off periodically during the day, all aircraft take off and land in waves (4 per day) within the same time windows (Figure 3). (7) This operational model reduces WIP time of delivery – packages are immediately placed on outbound aircraft instead of waiting around, yet this requires tremendous capacity to land, service, and launch aircraft as well as to sort, since all packages must be unloaded, sorted, and reloaded within tight time constraints. Therefore, hubs are located at passenger-light airports with large infrastructure to accommodate many aircraft.
Nowhere is this better exemplified than at FedEx’s “world superhub” in Memphis, Tennessee. Each night, 8,000 employees sort over 1.5 million packages. With a total of 3.3 million packages sorted per day, the Memphis hub is the largest mail and package sorting facility in the world. (8) Its efficiency relies on a continuous flow process (Figure 4 shows the superhub in action) (9). The Memphis airport is the world’s busiest airport after dark, with 140 aircraft arriving within a two and a half hour window between 10:30 pm and 1:00 am, a cycle time of one aircraft per 77 seconds.10 Aircraft take between 35 – 70 minutes to unload, equaling one container of ~245 packages entering the hub every 11 seconds. To assist in sorting, packages are placed onto one of three conveyor lines based on size and weight, then sent to the Matrix – where employees place packages face up for barcode scanning and an automated system of 42 miles of conveyor belts send the packages to the correct aircraft for outbound loading. The outbound launch of aircraft starts at 2:30 am; by 4:30 am the last of the 140 aircraft has departed. (10) This highly automated and efficient sorting and airline system is the critical competitive advantage of the company’s operating model. It’s also capital intensive, thus creating high barriers to entry and limiting competition. This unique operating capability allows FedEx to successfully deliver on its customer promise and business model of overnight delivery, thus creating and capturing value that is hard to reproduce.
In a fairly low margin industry, FedEx’s alignment of business and operating model has resulted in a healthy operating margin of between 5%-8% while generating revenues of $27.2 billion in fiscal year 2015 alone. (11) The company has also changed its pricing model recently – space is more valuable than weight and the new pricing model reflect this, resulting in increased yields (Figure 5). (5) As e-commerce increases worldwide, FedEx is well placed to leverage its highly efficient operating model to deliver on its business model in the years to come.
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