Expanded FedEx cargo hub not meeting expectations

June 15, 2009

Indianapolis International Airport, already suffering from a 10-percent drop in passenger traffic and a projected $15 million revenue shortfall this year, is also feeling financial drag from its single most important tenant.

FedEx Express cargo shipments, which amount to about half of the $25 million in airfield fees generated at the airport, fell 16 percent in the first three months of this year vs. the same period last year.

Moreover, a recently completed $214 million expansion of the FedEx hub appears to have generated fewer than half of the 800 jobs the Memphis-based cargo carrier said it expected when the expansion was announced in 2006 with celebratory headlines.

Then, FedEx's second-largest domestic hub employed about 4,200. Today, it employs 4,500, said FedEx spokeswoman Paula Bosler.

The Indianapolis Airport Authority spent $49 million to build aircraft parking aprons for the expansion, which boosted package processing capacity 30 percent and added 600,000 square feet of enclosed space.

Last December, FedEx confirmed it was looking at eliminating a Friday night shift here. Now, FedEx officials decline to discuss the status of local operations, including to what extent the company trimmed back operations.

"Federal Express' operations are integral to our local economy. Obviously, the uncertain national and global economy has had a negative impact on employment across many business sectors, including cargo," said airport spokeswoman Susan Sullivan.

"We remain confident that Federal Express will continue to grow its operations as economic conditions stabilize and improve."

But the slowdown in cargo comes as the airport authority grapples with passenger contraction and a bigger debt load. Airport officials say they have ample cash to cover budget shortfalls this year, but are now looking under every rock for ways to boost revenue and reduce costs.

Hitting financial targets is especially important to ensure the airport can shoulder the roughly $40 million a year debt burden over the next 30 years for the new $1.1 billion Col. Weir Cook Terminal, and maintain its credit ratings.

"It's unfortunate timing, isn't it?" said Kevin Schoonmaker, an analyst at Morningstar Inc. in Chicago who follows FedEx.

Cargo clobbered

Schoonmaker has throttled back his forecast for FedEx's "Express" air business. Though he had expected flat 2009 revenue and a 3-percent expansion in 2010, he now sees the business contracting 4 percent this year.

"As we look at shipping trends, we now believe volume will continue to contract during fiscal 2010."

FedEx is not alone.

"The industry is in crisis ... Cargo demand has fallen off a cliff," Giovanni Bisignani, CEO of the Montreal-based International Air Transport Association, said earlier this year.

In December, IATA had expected cargo volume to fall 5 percent. Now, "unfortunately, the shocking fall in demand that followed is making these projections look optimistic," Bisignani said more recently.

Revenue for FedEx's express unit took an 18-percent dive in the most recent quarter. Operating income is down 89 percent, despite markedly lower jet fuel costs.

One reason is that some customers who once shipped via air are now turning to ground, which is less expensive, Schoonmaker noted. FedEx has positioned itself to capitalize on that trend, with its expanding ground package businesses. That end of the company is growing, particularly with rival DHL's pullout from the United States.

That's little consolation to Indianapolis International, which collects from FedEx landing and apron fees of $10 million to $12 million a year, depending on its cargo volume. FedEx alone pays about half the airport's total landing fees, scheduled airlines most of the rest.

Through the end of March, cargo landing fees—mostly from FedEx—had fallen nearly $400,000, to $2.25 million.

The sum of landing fees the airport collected from passenger airlines fell $165,186, to $2.27 million.

Landing fees are the third-largest source of operating revenue at the airport, amounting to about 24 percent. Parking is 27 percent of operating revenue and terminal income, such as rents and the airport's cut of restaurant and retailer sales, are about 30 percent.

Prospects for FedEx are clouding up on another front, said Schoonmaker, pointing to legislation in the U.S. House that would reclassify the status of 100,000 FedEx Express workers. The status of the workers, who now fall under the Railway Labor Act, would be reclassified under the National Labor Relations Act.

Unlike FedEx arch rival United Parcel Service—which it blames for orchestrating the legislation, along with the Teamsters union—FedEx's operations can't be shut down by a local bargaining unit under the RLA.

"This is a vital issue for the future of FedEx Express," the company said this month as part of its campaign to fight the NLRA language inserted in the House version of the Federal Aviation Administration Reauthorization Bill.

FedEx said that if it is removed from RLA jurisdiction, it will cancel orders for 15 Boeing 777 aircraft "against a possible major change in the circumstances of our business."

The change in worker classification "has the potential to be tremendously damaging to communities like Indianapolis and to airport revenue," Schoonmaker said.

Thinking out of the box

While there's little if anything Indianapolis can do about FedEx's predicament, airport officials have been trying to diversify cargo operations. In May, the airport authority helped organize and host the first Midwest Healthcare Supply Chain Conference, an event that attracted big players from the logistics end of the life sciences industry.

The airport "was able to raise awareness about its advantages and successes in handling temperature-sensitive international air cargo to a national audience," Sullivan said.

Smaller cargo players at the airport, amounting to a fraction of FedEx's 5 billion tons moved here annually, are Tradewinds Airlines and Cargolux.

Cargolux flies between here and Europe a Boeing 747 loaded with pharmaceuticals. All told, it moved some 67 million tons last year.

FedEx still has about 97 percent of the cargo activity here. Indianapolis ranks eighth in cargo volume among U.S. airports and 21st worldwide.

Generating additional revenue is among the top goals of new Airport Director John Clark, who formerly headed Jacksonville International Airport.

Clark said he is looking at boosting both aviation and non-aviation activities at the airport. Might, for example, the new terminal's voluminous "civic plaza" also be a revenue-generating destination for entertainment venues?

Clark and his team also are looking at commercial reuse possibilities at the site of the old terminal along Interstate 465.

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