FedEx seeks global scale with TNT Express deal

It is a feature of contemporary urban life so ubiquitous that it is easy to take for granted. In New York, London, Brussels, Hong Kong and every other big city, the distinctively-coloured delivery vans of the international parcel-delivery companies pull up outside offices and homes, a driver jumps out and a package -- which often started its journey on the other side of the world - is handed over.

Yet Tuesday's announcement that FedEx of the US is planning a €4.4bn takeover of the Netherlands' TNT Express highlights the delicate economics behind such operations. Both FedEx and UPS have struggled with the shift from focusing on serving mainly clusters of high-volume corporate customers to delivering ecommerce packages to widely dispersed consumers. These challenges pushed TNT Express, despite it controlling 12 per cent of the European economy and express parcel markets, to a €195m net loss for 2014.

FedEx hopes by building scale in Europe to benefit from feeding extra parcel volume into facilities such as TNT's air cargo hub in Liege, Belgium.

"Undoubtedly, the biggest opportunity here is in Europe in a reduced pick-up and delivery cost that FedEx will enjoy as a result of TNT's network," Alan Graf, Fedex's chief financial officer, told analysts on a conference call. "I feel very comfortable that we are going to achieve cost benefits across the board."

The deal is also far more likely to gain approval than UPS's failed €5.2bn bid for TNT, tabled in 2012. That deal foundered because the European Commission was concerned that it would have left only two or three significant competitors in many European delivery markets. FedEx currently holds a market share of only about 5 per cent in economy and air express deliveries in the EU, against 12 per cent for TNT, 16 per cent for UPS and 19 per cent for DHL, owned by Deutsche Post.

Alan Braithwaite, a UK-based logistics consultant, said the difference between the barred UPS transaction and the planned FedEx deal is the ultimate purpose. UPS was seeking to increase its already substantial scale in the European market. FedEx will be aiming to use TNT Express's scale to benefit its wider world market.

"The geographic fit will be much better with FedEx than it would have been with UPS," Mr Braithwaite said. "For this deal, it's not driving scale within a market. It's driving global scale and presence."

Many of the benefits of that increased global scale will be felt, if the deal goes through, at Liege airport, FedEx's hub in Memphis, Tennessee, and other big sorting centres.

The costs of building such facilities - filled with automated sorting equipment - are high. The costs of running them, however, vary relatively little according to whether they handle only a few packages or are operating at full capacity. They are far more profitable, consequently, when running nearly full.

Package delivery operators refer to more fully-utilised networks as being "denser".

"This is not a redundancy play," Mr Graf said, referring to the TNT deal. "This is productivity and density, and combining two powerful networks on a global basis."

The challenges of managing such networks - keeping them busy but not letting them become congested - are growing as couriers increasingly handle ecommerce deliveries to individual homes. In both the US and Europe, operators have struggled to gear their networks up to handle pre-Christmas peaks in ecommerce deliveries that have surprised many operators with their size and timing.

In the US, UPS has struggled with the past two Christmases. Its network grew severely congested in 2013, while in 2014 it overcompensated and spent too much preparing for peak volumes that largely failed to materialise. It was a shift into business to consumer (B2C) deliveries, rather than traditional business to business (B2B) deliveries, that helped to push City Link, a UK courier, into insolvency on Christmas Eve last year.

"If you try to build B2C on to a B2B network, that has been a real headache," Mr Braithwaite said. "They don't sit comfortably in the same operation unless you get to a particular scale and you charge a premium."

The challenge for FedEx will be to achieve that scale without causing the kind of disruption for customers that has often bedevilled previous logistics mergers. Tuesday's 2.9 per cent rise in FedEx's share price - to $171.49 - suggests investors are confident the company can avoid those pitfalls. TNT's shares increased 28.1 per cent to €7.69.

However, Mr Graf was careful to caution investors that there would be high costs and a long timeframe. "That will require more upfront cost than would normally be the case," Mr Graf said of the company's "aggressive" integration plan. "But having said that, I think the integration is going to take three or four years."

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