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Tuesday, January 14, 2003

By Jim McKay, Post-Gazette Staff Writer

FedEx Chairman and founder Frederick W. Smith built the air express company on a fleet of jets that deliver packages and documents overnight. But lately he's had reason to be thankful for the lowly truck.

	FedEx Chairman Fred Smith, left, and FedEx Ground President Daniel Sullivan in Sullivan's office in Moon yesterday. The men discussed FedEx's transformation from an overnight carrier to a full-service package distribution firm. (Martha Rial, Post-Gazette)

The Memphis-based company's Moon-based FedEx Ground unit is on a roll, contributing an increasing percentage of profits to the corporate bottom line as the traditional air express business is in a bit of a slump.

"It has more than exceeded our expectations," Smith said yesterday of FedEx Ground as he left a board meeting held at the division's recently expanded headquarters. "It has been a very very good thing for FedEx Corp."

FedEx Express, the air delivery unit, continues to contribute the biggest share of revenue to the combined enterprise, $15.3 billion out of $20.6 billion in fiscal 2002. FedEx Ground, which became a unit of FedEx Corp. in 1998, accounted for $2.7 billion toward the total, while FedEx Freight, a regional carrier specializing in partial loads, brought in about $2 billion of revenue.

But in the just-ended second quarter of fiscal 2003, FedEx Ground reported a 69 percent increase in operating income, to $135 million from $80 million a year ago, while FedEx Express posted operating income of $228 million, down 26 percent from $309 million from the year-ago period.

The performance of FedEx Ground, formerly RPS Inc., kept overall earnings for the quarter from slipping. Net income for the quarter was unchanged at $245 million, while revenue rose to $5.67 billion from a year ago's $5.14 billion.

Smith said he expects FedEx Ground, which now has 41,000 employees and driver contractors, to maintain steady growth despite the uncertain economy. He predicted the air express unit would eventually shake its troubles, too.

Despite weaker-than-expected economic growth, Smith said the company thinks it still can meet its earnings target of $2.77 per share for fiscal 2003, aided by a modest economic recovery in the final half of its fiscal year, which ends May 31. "It's a complicated economic landscape these days," Smith said.

The ground and air express units began operating under the FedEx brand in 2000, a move that combined sales and some administrative functions but let operations remain separate.

Fed Ex Ground uses nonunion truckers to deliver packages in white vehicles identified with the well-known FedEx logo. UPS, its main competitor, relies on an army of Teamster drivers.

"We think we've got the best of both worlds," Smith said.

The board reviewed plans announced last fall to spend $1.8 billion over the next six years to expand FedEx Ground's capacity to deliver small packages to 4.8 million a day from 2.5 million a day. The company broke internal records the week of Dec. 2, when daily volumes averaged 2.7 million packages.

FedEx Ground President Daniel Sullivan, who helped found the company as Roadway Package Systems in 1985, praised local employees and gave credit to FedEx Home Delivery, launched three years ago, for fueling growth.

FedEx Home, designed to capitalize on Internet and catalog shopping, achieved profitability in the second quarter ended Nov. 30, one year ahead of the original plan, Sullivan said.

FedEx Home began in 2000 and by last September had expanded to where it can reach nearly all of the U.S. population. The company currently serves 34,000 shippers, compared with the 143 it had on the books its first day of operation.

Sullivan said the expansion would continue the company's tradition of automation.

RPS was the first ground carrier of small packages to use bar coding and automated sorting technology and the company now uses fifth-generation technology that permits packages to be tracked in near real time and transmits electronic signatures to show proof of delivery.

He said the company remains committed to the region. FedEx Ground employs about 1,900 at its headquarters building, which has plenty of space to expand. Counting driver contractors at terminals in McKees Rocks, Sewickley and in Westmoreland County, local employment is about 2,100.