FedEx's Struggles May Be Less About Global Demand And More About 'NotPetya'

FedEx's struggles could have roots in the ‘NotPetya' cyberattack. (Photo: Facebook/FedEx)

FedEx Corp. FDX and arch-rivals UPS Inc. UPS and Deutsche Post DHL DPSGY have different views of the world they deliver in.

FedEx said March 19 that it experienced slowing global economic conditions during its fiscal 2019 third quarter, which ran through the end of February. The weakness in part caused total revenue at its air and international unit, FedEx Express, to decline one percent over the fiscal 2018 period. This followed an eight percent year-on-year gain in the first half of its fiscal year.

Atlanta-based UPS, by contrast, has said it saw little through the winter to change its bullish international outlook first expressed in January, when it announced strong fourth-quarter international results. "While there is (a) slight softening in a couple of lanes, there are other lanes where growth is occurring," said Steve Gaut, a UPS spokesman. The company is "shifting resources to growth opportunities, especially cross-border trade expansion," Gaut said. Projects are underway in the United Kingdom, the Netherlands, India and Canada to expand UPS' ground network, and it is wrapping up a $2 billion European investment program begun in 2015, he said.

DHL seems to have managed through any global downturn relatively unscathed as well. The Bonn-based company said recently that it posted strong 2018 results across its four divisions, including its Express unit that competes most directly with FedEx and UPS. "The expansion of our parcel business in Europe is proceeding successfully," said Frank Appel, the company's CEO.

While there are certainly areas of global economic decline – the International Air Transport Association reported that airfreight in January posted its weakest year-over-year results in three years – international commerce is not falling off a cliff. A recent JP Morgan Chase index of global manufacturing purchasing managers came in at 50.6, the lowest level in 30 months but still in a range that denotes expansion. FedEx Chairman and CEO Frederick W. Smith said Tuesday night that "green sprouts" are visible heading into the spring. "We are seeing some pickup across the Pacific," Smith said during the analyst call to discuss the company's results. "Our package business in Europe is now growing again."

So why are UPS and DHL prospering while FedEx is struggling? The answer may have less to do with macroeconomics and more to do with the notorious June 2017 hack by "NotPetya" malware, which became the worst case of state-sponsored cyberterrorism in history. The attack targeted Windows-based operating systems, encrypting a hard drive's file system table and preventing Windows from booting. Companies such as pharmaceutical manufacturer Merck & Co. MRK and Danish shipping giant A.P. Moller-Maersk, and institutions like the British healthcare system, were nearly brought to their knees.

Dutch delivery firm TNT Express, which FedEx acquired for $4.9 billion in 2016 and which had long been burdened with an aging information technology (IT) system (especially at its all-important hubs) was hit very hard. The attack cost FedEx $300 million in lost business and clean-up costs. In addition, the virus hit as the company was working through what was already a complex integration. In his remarks, Smith said the attack would have bankrupted TNT Express if it were a stand-alone company at the time.

Memphis-based FedEx has been upfront about the impact of the attack on the integration's progress. It also expressed confidence that the IT issues have been largely resolved. Robert Carter, the company's long-time chief information officer, said Tuesday night that more than 600 TNT applications have been retired to-date and that many hundreds more will be retired over the coming year. "TNT's applications were historically very localized and bespoke," Carter said. "As we adopt the core FedEx applications, we're standardizing both business processes and applications at the same time." By simplifying the network, "TNT system's reliability is at an all-time high," Carter said.

Nearly 21 months later, though, what is less well-known is the residual damage – in perceptions and reputation – caused by NotPetya. Benjamin J. Hartford, an analyst for investment firm Baird, said in a note yesterday that the attack "appears to have eroded any margin for error" for a company confronting a deteriorating economic climate. Jerry Hempstead, a former top parcel industry executive who runs a parcel consulting firm, was blunter in his assessment. He said the attack inflicted severe trauma on shippers, and that many have sworn off FedEx forever.

As Hempstead described it, the attack locked up all the data that underlay shipments that were en route. As a result, no shipment already in the pipeline could clear customs. FedEx could not track and trace a shipment, or generate a bill, Hempstead said. Each piece had to be researched, and FedEx had to revert to the shipper to reinitiate the documentation process, he said.

In addition, no TNT customer could tender shipments, Hempstead said. That's because most, if not all, shipments were rendered either through a systems integration process between the shipper and carrier, or by using an internet-based Application Program Interface (API). The crisis went on for weeks, Hempstead said.

Shippers were boxed in. They could not get answers on shipment status, could not tell their customers if and when they would receive their orders, and were not getting paid for the orders trapped in the network, Hempstead said. What's more, they had no idea when FedEx or TNT Express would be operating again. Many sought out UPS or DHL Express, which effectively split a windfall of non-discounted packages. Hempstead said he suspects that some shipments are still sitting undelivered.

According to Hempstead, FedEx's current struggles are not a global trade story, but one of an IT nightmare whose impact may linger for years. "It will be a generation before former TNT customers will consider ever entrusting another package to FedEx," he said.

FedEx continues to have confidence in the strategy and execution behind the TNT Express integration. Combining FedEx's global air network with TNT Express' European road infrastructure will give businesses in Europe and around the world a compelling value proposition, executives maintain. About 35 percent of the integration is complete, including in the U.S., Canada and the Middle East. "As we integrate stations, duplicate pickup and delivery schedules are eliminated and routes are optimized, thus reducing costs," said Raj Submaraniam, the company's new president and chief operating officer. "At the hub level, our road and air hubs are outfitted with technology that enables injection of volume into the lowest-cost air or road network."

On February 6, the company said it would start inducting FedEx Express' intra-European shipments into TNT Express' European road network. For many parcel shipments, transit time will improve on average by at least one business day on approximately 40 percent of the lanes in the countries where the service is implemented, The rollout initially took place in seven countries; the entire 28-country European network will be on-line by June, FedEx said.

"We still think that the merger made a lot of sense for both parties," said Rob Martinez, president and CEO of consultancy Shipware, LLC. "I'm not seeing a general reluctance to use the integrated network from the shipping public."

One of Shipware's executives, Rebecca Lannon, who spent more than a decade at FedEx in a revenue management capacity, is not as sanguine. "Without complete integration of TNT into the FedEx network, costs and delivery time have yet to be optimized," Lannon said. "In the near-term, longer transit times, higher shipping costs, and the data breach will result in lower market share internationally for FedEx. Where DHL is faster and more cost-effective, it will get the business."

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