Bracing for Brexit
Fedex and other delivery companies prepare for an event with significant downside, analyst says
The United Kingdom is fast approaching its exit of the European Union with no transition plan in place, an event an analyst says has significant downside for Fedex and other delivery companies.
Brexit, the term for this exit, is set to happen March 29. Among the options for Brexit are both sides reaching an agreement on the U.K.’S withdrawal, complete with a transition period so businesses can adapt, or a “no deal” scenario in which the sides fail to agree, and the U.K. leaves without any transition measures.
“We believe the downside is significant. Although we expect that in the event of a no deal or hard exit, the government is likely to try to carve out aviation to keep goods and people flowing in and out of the country,” said Helane Becker, a Fedex analyst at financial services firm Cowen, in a note.
Becker said Fedex, UPS and DHL are concerned about a no deal scenario “as they worry it will take longer for packages to get through their network and to the end user.” Those fears have led to the companies “aggressively planning” for a Brexit without a deal.
On its dedicated Brexit page, Memphis-based Fedex says “like all businesses” it’s standing by for more details from United Kingdom and European Union officials on how Brexit will roll out and how it can be prepared when the U.K. is set to leave the EU.
Analyst: Brexit could delay Fedex shipments
Fedex is seen as an economic bellwether — it goes as the economy goes. And the International Monetary Fund said in January global expansion is slowing and trade policy uncertainty remains high, a gloomy outlook for a staunch free trade advocate like Fedex.
Brexit having a negative economic effect beyond its own borders is a “rising possibility,” the IMF says. Goods would be trickier and costlier to move between the United Kingdom and the European Union than they are now with the introduction of customs clearance.
No deal would mean U.K. trade with the European Union would need to fulfill the same requirements as other countries outside the union, including duties and tax payments, Fedex notes.
Customs clearance and driving license issues leading to driver swaps at the border could delay packages, according to Becker. She expects couriers like Fedex to suspend on-time guarantees as they get acclimated and raise customer rates with packages needing “greater handling” to get through customs.
Fedex says it may use alternative entry and exit points within the United Kingdom and Europe, among other measures, to mitigate the effects of any Brexit scenario.
In a statement Thursday, Fedex said the best Brexit outcome for its customers would be where new barriers aren’t created and customs processes are streamlined, among other things.
“Fedex continues to plan for all potential scenarios
“Brexit, to take the elephant in the room, remains uncertain, but Fedex has a long history of experience in international, cross-border logistics, which gives us great strength here in Europe for supporting customers through whatever reality we face in the coming months and years.”
Bert Nappier on behalf of our customers and team members,” the company said. “As a global company with a long history of experience in international, cross-border logistics, we are uniquely positioned to provide our customers with outstanding service regardless of challenges resulting from Brexit.”
Fedex exec looks to ease fears on Europe
As Brexit approaches, Fedex Express Europe President Bert Nappier is looking to ease fears about how a European economic slowdown could hurt Fedex’s business further.
But he also says the looming Brexit remains “the elephant in the room.”
Fedex Express posted underwhelming international results in its most recent earnings report, particularly in Europe where its package volume was lower than expected. The company consequently downgraded its 2019 forecast as it expects the disappointing trend to continue.
In December, Fedex founder and CEO Fred Smith said Brexit is a “tremendously difficult situation” contributing to this macroeconomic slowdown. Fedex is rolling out cost-cutting measures like employee buyouts to mitigate the effects of global headwinds.
Nappier appears undeterred by the year’s expected challenges. He said in a January Linkedin post he is “absolutely confident” in Fedex’s European business and the strength of Europe’s overall business community.
That’s despite a slowdown in the Eurozone, countries using the euro as their common currency, and economic “softness” in the United Kingdom, he said.
“Brexit, to take the elephant in the room, remains uncertain, but Fedex has a long history of experience in international, cross-border logistics, which gives us great strength here in Europe for supporting customers through whatever reality we face in the coming months and years,” Nappier said.
As the Brexit deadline draws closer, Fedex is keeping an eye on its European investments. Smith and Express CEO Raj Subramaniam visited the Paris Charles de Gaulle Airport hub with Nappier in January for a look at its ongoing expansion. That hub is Fedex’s largest outside the U.S., taking a backseat to the Memphis global hub.
“Through these investments and the TNT integration, we are building Europe’s premier logistics business,” Nappier said in a recent post. “This sets us up to be the provider of choice in facilitating European trade, particularly in uncertain times.”
Fedex deal in Europe has high price tag
The slowdown comes as Fedex is still trying to fully integrate European courier TNT Express into the company, which significantly increased the company’s shipping presence in the region but also came with a big price tag.
Fedex said integrating TNT into the company cost $114 million in its most recently reported quarter, according to an SEC filing. It expects the process to total roughly $1.5 billion through 2020. Additional integration costs may incur after 2020, the company says.
Fedex bought TNT for $4.8 billion before TNT was hit by a cyberattack costing hundreds of millions of dollars. Fedex said the attack led to fewer shipments in the TNT network.
Fedex said in the filing it believes it will still realize the benefits it expected when it first acquired TNT. But the full scope of those benefits won’t be realized past 2020, Fedex said, as Europe’s economy decelerates.
Subramaniam said in December the TNT integration and overall European operations will be priorities as he settles into his new position.
More recently, Fedex has touted signs of returns on the deal.
Nappier, who also serves as CEO of TNT operations, said in an interview with German publication “Die Welt” the integration has gone “really well.”
And Fedex said Thursday transit times are improving by roughly 40 percent for intra-european economy shipments thanks to returns from the TNT acquisition. Those are shipments delivered within Europe in two to five business days.
“The service improvement is currently being launched across Germany, United Kingdom, Benelux, Poland and Spain and will progressively roll out across the rest of Europe throughout the first half of 2019,” Fedex said.
Max Garland covers Fedex, logistics and health care for The Commercial Appeal. Reach him at max.garland@commercialappeal.com or 901-529-2651 and on Twitter @Maxgarlandtypes.