Letter #285: Frederick Smith (1999)
Founder of Fedex | 1998 FDX Shareholder Letter
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This past weekend, Frederick Smith passed away. Frederick was the Founder, Chairman, and CEO of FedEx Corporation, as well as a minority owner of the Washington Commanders. He reportedly first outlined the idea for FedEx as part of a college paper. However, after college, rather than act on his idea, he was commissioned in the US Marine Corps as a platoon leader and a forward air controller in South Vietnam, serving two tours of duty and receiving two Purple Hearts. After being honorably discharged from the military, Frederick purchased a controlling interest in Ark Aviation Sales, an aircraft maintenance company, and turned it’s focus to trading used jets. A year later, he founded Federal Express.
Today’s letter is Frederick’s 1998 Shareholder Letter for FDX. FDX Corporation was the predecessor name to FedEx Corporation, and the successor holding company structure to Federal Express Corporation. This was a particularly interesting letter because it was the first full year of consolidated operations, and Frederick took the time to lay out FDX’s financial situation, covers their portfolio positioning, shares perspective on macro trends affecting the business, and discusses the importance of company culture.
I hope you enjoy this letter as much as I do!
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Letter
DEAR FELLOW SHAREOWNERS
In our first full year of consolidated operations, FDX Corporation turned in a record performance in three very important areas. First, we increased shareowner value by growing profits, expanding margins, and strengthening our balance sheet. Second, we enhanced our service offerings to help our customers create a competitive advantage in today’s global marketplace–providing innovative, technology-enabled supply chain solutions along with e-commerce connectivity. Third, we continued our commitment to a ”people culture” that recognizes and rewards the above-and-beyond efforts of our FDX employees and contractors.
During the past year, we also faced many challenges. Some were external, such as managing through the Asian economic crisis. Others were internal, including contract negotiations with the Fedex Pilots Association that required costly strike contingency plans before we reached a five-year agreement. In some cases, these challenges required extraordinary efforts that may have deterred us from reaching some goals as quickly as we would have liked. Still, the FDX network turned challenge into opportunity as we proved that we deliver far more than packages. We deliver results.
FINANCIAL SUMMARY: FDX Results for Shareowners
In FY99, FDX exercised strong financial discipline to increase net income and earnings per share at rates surpassing our solid revenue growth.
Revenue increased 6% to a record $16.8 billion.
Net income jumped 26% to $631 million, reflecting package volume growth as well as excellent cost controls and aggressive yield-management programs.
Earnings per share rose to a record $2.10.
FDX market value increased 73%, which led to our second two-for-one stock split in the past three years.
As our results indicate, in FY99 FDX continued to deliver exceptional shareowner value.
PORTFOLIO MANAGEMENT: FDX Solutions for Customers
When I reported to you last year, I emphasized the following twofold strategy to capitalize on our broad range of service offerings:
Independently, each FDX operating company would remain focused on a distinct market segment in order to operate in the most efficient and profitable manner possible.
Collectively, we would create synergies across companies through coordinated sales and marketing programs linked by state-of-the-art information technology.
This strategy has paid off handsomely since FDX was created 18 months ago. In FY99, our two largest operating companies–FedEx and RPS–each set new records for service levels and financial results. Independently, that’s an outstanding accomplishment. But collectively, these results confirm that the whole certainly is greater than the sum of its parts. Across every operating company, the entire FDX team is working together to provide the total solutions that our customers demand and deserve.
Operating Independently
Each FDX company competes in a separate, well-defined segment of the total transportation and logistics market.
FedEx–one of the most recognized business-to-business brands in the world–is the leader in virtually every segment of the information-intensive express transportation market.
RPS offers cost-effective, guaranteed ground package delivery, utilizing state-of-the-art sortation and scanning technology.
Viking Freight is the less-than-truckload leader in the western United States, providing reliable, on-time regional freight service.
Roberts Express–which created the expedited delivery market–provides the fast response and special handling required to meet our customers’ service-critical needs.
FDX Global Logistics offers one-stop shopping for complete supply chain solutions by combining transportation, information, and physical logistics services.
At FDX, we also view these individual companies through a collective lens. While each company is focused on meeting distinct market needs, our customers have a lot in common. They want an easy, convenient way to connect to the high-tech, high-speed global marketplace. And it’s our responsibility to help them choose the right FDX network at the right time, with the right price.
Sharing Collective Strengths
Leveraging cross-company synergies allows FDX to deliver meaningful customer benefits in two very important areas.
Customer Benefit #1: Coordinated sales and marketing programs are introducing our customers to FDX “sister companies” that they haven’t done business with before.
FDX has created a new collaborative sales group, called Worldwide Services, to provide complete supply chain solutions to our larger customers when those solutions require the involvement of more than one FDX company. Worldwide Services has already delivered incremental revenue and helped strengthen customer relationships. In response to market demand, we have recently expanded this group’s responsibilities and have extended our cooperative sales strategy. Quite frankly, our customers have responded even more enthusiastically than we had expected when given the opportunity to buy across the FDX portfolio.
Customer Benefit #2: Information integration is making it easier for our customers to do business with FDX.
When it comes to managing synergies across businesses, we’ve found that seamless information integration is a critical component. In the past year, we combined FedEx and RPS domestic shipping functionality on our FDX PowerShip® and RPS Multi-Ship® proprietary computer networks. Now, customers can sit at the dedicated computer installed in their offices and–with just a few keystrokes–switch between FedEx and RPS domestic shipping. In addition to improving our proprietary systems, we have also upgraded the functionality on our Web sites and concluded an agreement with Netscape Netcenter, providing access to FedEx and RPS online services for more than 13 million users. Going forward, we expect FDX technology to enhance a range of customer-related activities, including customer automation, tracking, and management reports.
BUSINESS TRENDS: The FDX Global View
As FDX continues to pursue its twofold strategy for portfolio management, we are realizing our vision for a high-tech marketplace that requires fast, global reach–the same vision that drove the birth of Federal Express and the modern air/ground express delivery industry in the early 1970s. Today, FDX is uniquely positioned to take advantage of four major trends that are shaping what many now call the Network Economy.
Providing Fast, Global Reach
As the world’s economy becomes more fully integrated–and as barriers and borders continue to come down–it just makes good economic sense to source and sell globally. That, in turn, has opened multiple legs of transportation on both the inbound “sourcing” side as well as the outbound “selling” side of virtually every multinational business.
But this past year has tested many global companies, including FDX, which serves 210 countries principally through the FedEx system. Despite the softness in Pacific markets–a trend that only recently seems to be reversing itself–the FedEx international door-to-door express business still grew in FY99, though at less than its recent rate. This continued growth is due, in part, to the flexibility of the FedEx global network–the ability to reconfigure our system or simply to reroute existing flights in order to take advantage of favorable market trends.
But in a “business without borders” environment, the true challenge is to create a framework for global commerce. As the world‘s largest express carrier, Federal Express supports an open aviation regime, which we see as the best way to ensure free and fair trade in the air cargo industry in the 21st century. In FY99, a new bilateral agreement was reached with China, doubling the frequencies available to U.S. carriers. FedEx remains the only U.S. all-express carrier with authority to fly to and from China. As we continue to work toward true “open skies” all around the world, FDX will also work aggressively toward other global issues, such as streamlined customs clearance procedures.
Serving and Served by High Tech
The second major global trend is the increase in the high-tech, high value-added sector as a percentage of total economic activity. Information technology alone now contributes more than one-third of real economic growth in the United States. But the high-value-added sector is much broader, including pharmaceuticals, automotive, electronics, aviation and other goods with high value per pound. Over the past 50 years, the weight of the nation’s economic output has barely changed while the value has increased fivefold.
As part of the new supply chain model, FDX is both a transporter and user of high-tech and high-value goods. We supply the transportation, information, and logistics solutions that help companies like Cisco, Dell, and Sun Microsystems do business more effectively. But we are also a customer of information technology goods. FDX spent nearly $1.5 billion last year to strengthen our superior technology capabilities and to attract the best and the brightest people.
Speeding the Supply Chain
The third influence is the increase in fast-cycle logistics as companies of all sizes discover the power of supply chain velocity. It’s not just doing business faster; it’s doing business smarter by replacing inventory with information. After all, a warehouse is just an expensive place to put something so you know that you have it. That’s managing inventory at rest. Instead, if you can substitute real-time information to manage inventory in motion, you can dramatically reduce overhead and obsolescence while speeding time to market.
To take advantage of the move toward faster, more efficient supply chains, last October we created FDX Global Logistics. We believe that the future of logistics will not be in brick-and-mortar warehouses, but in the kind of information-intensive services that have been a hallmark of FedEx and now FDX. Our operating companies are helping customers move from managing inventory at rest to managing inventory in motion, providing the added value, visibility, and velocity that companies need to succeed.
Conducting Business Electronically
Finally, perhaps the best way to minimize time and distance is through electronic commerce in general and the Internet in particular.
FedEx was a pioneer in electronic commerce long before the Internet was opened for commercial use. In 1987, we launched the original FedEx PowerShip® network of proprietary computers, allowing customers to process their shipments electronically. In 1996, we added FedEx interNetShip® to our popular Web site at www.fedex.com, becoming the first company with true Internet shipping capabilities. In fact, FedEx interNetShip recently received the prestigious Computerworld Smithsonian Award for its innovative use of technology. Today, with a combination of FedEx PowerShip computers, FedEx Ship® software, and FedEx interNetShip, more than two-thirds of U.S. domestic shipping transactions are handled electronically. As far as two million FedEx customers are concerned, it doesn’t matter whether they use a designated computer terminal, proprietary software, or the Internet. It’s all about convenience, accessibility, and connectivity.
Overall, the Internet has done for e-commerce what Henry Ford did for the automobile: It’s taken a luxury for a few and turned it into an affordable tool for many. The Internet has opened e-commerce to companies of all sizes and has created a new global business channel for selling products and delivering digital information.
When calculating the Internet’s full potential, however, it’s important to break away from the “buy-it.com” mentality in the popular press and look at the much larger business-to-business sector, which is more than 10 times the size of the business-to-consumer market. Business-to-business e-commerce is estimated to top $100 billion in sales this year and exceed the trillion-dollar sales mark by 2003. Computers and electronics–already two of our largest customer segments–account for almost half of this category, and supply chains are increasingly moving online. That’s why we call business-to-business the “sweet spot” of e-commerce, and why we view these electronic customer connections as an incremental and diversified source of revenue for FDX.
While business-to-business e-commerce will be–by far–the largest segment, we are also leveraging the strength of the FDX portfolio in the business-to-home market. FedEx will continue to handle the “time-sensitive” side of residential deliveries, particularly for higher-value goods. But we are also testing a new “service-sensitive” RPS residential delivery service to expand our comprehensive mix of transportation and logistics solutions–and to open the door for additional Internet retail business. Depending on the results of the Pittsburgh-area test program, we could roll out a business-to-residential RPS delivery service as early as next spring.
Connecting the Network Economy
The new economy is global, high-tech, fast-cycle, and networked through e-commerce–four trends that are coming together to change the way we all live and work. People will increasingly have the ability to communicate and transact business anywhere, any time as we move from mass production to mass customization.
At FDX, our worldwide transportation network connects our customers to the global marketplace. Our information network connects our customers with their customers and with their supply chain alliances. But in the new economy, there’s one more essential network.
CORPORATE CULTURE: The FDX Commitment
Trucks and airplanes can’t go anywhere without people. Computers still can’t rule the world alone. Even in this Network Economy–or perhaps especially in this Network Economy–the essential ingredient is the human network: people who keep the entrepreneurial spirit alive. I believe FDX has the best people network anywhere, with more than 190,000 employees and contractors who will do “absolutely, positively” whatever it takes to serve our customers.
In the past year, our companies have received more than their share of accolades, consistently ranking as one of the best places to work by publications such as Fortune and Working Mother. But I believe the true measure of our people is found in the thousands of stories that play out every day, all around the world – whether it’s a driver who springs into action to save the life of a stranger trapped in a wrecked car, a courier who drives 200 miles out of her way on Christmas Eve to deliver medicine to a sick child, or an employee who decides to walk 15 miles to work, in the middle of the night with snow and ice on the ground, when his regular ride falls through.
Our people are the faces of FDX, and I believe that our company has a very special bond with our employees, our customers, and our shareowners. To each of you, FDX makes a corporate commitment.
To FDX teammates, we thank you for your unwavering commitment to our customers, and we pledge to strengthen our mutual opportunities. Our companies are great places to work because you make them that way.
To FDX customers, we pledge to help you succeed in the fast-changing global marketplace. Independently, FDX companies will provide the transportation, information, and e-commerce solutions you need for superior supply chain performance. Collectively, we will make it easier for you to buy across the entire spectrum of FDX services, and we will leverage technology to do so.
To FDX shareowners, we pledge to continue our focus on increasing shareowner value. Our five-year goals call for annual earnings growth in the 12% to 15% range and return on equity at or above 20%. We expect to achieve these results by growing our business, improving operating margins, and making more efficient use of capital.
Our FY99 performance was a great start for our new company, but I believe the best is yet to come. FDX has built superior physical, virtual, and people networks not just to prepare for change, but to shape change on a global scale: to change the way we all connect with each other in the new Network Economy.
Frederick W. Smith
Chairman, President and
Chief Executive Officer
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