FedEx CEO Frederick W. Smith talks business and the economy (LIVE, 5/14)

Well, the business is very strong in many ways. Of course, we've had our challenges. I think it's important that I say just a bit about what FedEx does because sometimes that's misunderstood. We pick up and transport packages and freight from every person in the world to every other person in the world, except for the four or five places prohibited by the United States government. So the reason that's important is that people see us in their neighborhoods where we perform business, the consumer deliveries, but they don't see us moving the defibrillators and the ventilators and the airplane parts and things of that nature. So in our international business, it's been quite challenged really since the trade wars began in the spring of 2018. We were sort of the first people to talk about that and the tremendous pressure on Europe that the dispute with China and the United States caused. But now with the COVID-19 situation, we're basically operating an aluminum highway across the Pacific and from Asia to Europe and to a lesser degree across the Atlantic on a daily basis. We generally have about fifteen or sixteen flights across both the Pacific and the Atlantic. So in that sector, we have flown hundreds and hundreds of flights in and out of China all during this period of time. We first got exposed to this virus in early January because we had about 900 employees in Wuhan. So we've been dealing with it for a long time. So we never ceased service to China and now we are flying just a prolific amount of flights moving PPE and all sorts of medical equipment. In fact, we've moved incredibly about 17,000 tons of PPE. So as you've seen, the concern about PPE has dissipated a great deal and a big part of that was the airlift that was put in place by FedEx. We've been the biggest participant, of course there have been others like UPS and Atlas and so forth. And then the domestic U.S. business, our B2B business, the business traffic contracted significantly when the lockdowns went into place, but it was replaced by enormous amounts of business-to-consumer deliveries. And fortunately over the last two or three years we have been leaning into that sector significantly, including for instance opening up Sunday as a regular delivery day just this past January, which was a very, very good thing that we did. So in the freight business, which is also a big part of our company, the industrial economy had not been doing very well prior to COVID-19 and it's definitely been hit hard. But I would say that we saw the lowest point we believe in mid-April and there is a resurgence of some industrial shipping now. China is almost fully back online with almost backlogs both to North America and to Asia. So that's sort of a recap of what we're seeing in broad terms.

Well, it's very hard to see. And when you have the head of the Federal Reserve yesterday saying he couldn't see, I'm sure he did not go out on a limb and say anything specific. But I will make this comment: you know, the United States is a very, very wealthy country and our ability to put forth these enormous amounts of money in the CARES Act and so forth indicate to us, and the traffic we're seeing, there's still a significant amount of industrial activity underway. I mean, it hasn't collapsed, which is what I think a lot of people thought. What's really been hurt are those things where people come close together: hospitality, entertainment, travel, hotels, and things of that nature. So I don't know whether it's going to be a U or an L or whatever the case may be, but I'm optimistic that there's enough economic activity that we can build on. And assuming that the medical folks deal with the disease itself competently, I'm more optimistic than most.

Well, as I mentioned, we got into this thing very early on because we started dealing with it in China in January and then we started dealing with it in Europe in February and then of course it became an enormous issue here in March. For many years we've had a very competent medical advisor, Dr. Avis, who helps us with all kinds of things around the world, not the least important which is our participation in disasters. That's sort of our main charitable activity. We have the hose in the house if your house catches on fire. So for instance, in Hurricane Maria in Puerto Rico in 2017, we donated a hundred wide-body flights. We've been dealing with this type of thing of disasters and floods and earthquakes and so forth. So to pivot over to COVID-19 was not as difficult perhaps as some companies had it. And Dr. Avis, who's the lead doctor, very impressive resume, helped us to comply with all the CDC and WHO regulations or recommendations. So we have done that. We've spent enormous amounts of money and our procurement people are just real heroes as well because getting masks, getting sanitizer, getting all of the things to keep our folks safe, because that was our job one, we felt. And again, we began doing that in Wuhan, the epicenter of this thing, in January. So we knew how to do it. I'm sure that there are things that the WHO and CDC wish they had done earlier, but we've been able to keep up with it pretty well.

Well, again, we've done all the things CDC and WHO has recommended in terms of the masks and the sanitizers and the spatial distancing and so forth. Our experience in our Newark hub is actually slightly better, as best that we can tell, than what the community itself is experiencing. So obviously our hearts go out to everyone who's been affected by COVID-19. My best friend died of it three weeks ago, so it's hit all of us. But I think as an essential business, there's no way we can be divorced from the community issues that we work in. But I think our folks have done everything humanly possible to keep our teammates safe. You know, FedEx is a highly automated company to start with, and while machines do break down, they don't get sick.

You know, I think automation happens on its own pace. It's been going on a long time. A lot of people talk about the dispute between China and the United States and China took all the jobs. In actual fact, about 75 to 80 percent of them were eliminated by automation. So if you go to one of the FedEx Ground facilities, it's incredible because there are no human beings in it, it's all automated. The Express operation where you have to interface with an airplane on the ramp, which is what the Newark facility that you were talking about is, that has a bit more manual intensity. And I don't think in the near term there's any way it will be automated. But we have a very, very big effort in terms of robotics and automation and I think it will be gradual and over time, not some revolutionary change.

Well, I wouldn't say we are wrestling with it. We just acknowledge the fact that we're going to have to provide it. We have great customers like LabCorp and Quest, who are the two largest national chains. We were heavily involved with them, the task force to get all of the tests early on out and the drive-thrus where we set up special pick-up systems and our little sensors to track the specimens. And it's expanded and expanded and expanded. So we believe we will have to have the capability to monitor anybody that comes in one of our facilities, which we already have in most places. When I walked in today, we have an electronic temperature reader in this little small building I'm in. So all of our big facilities, we do temperature testing. If somebody has an issue, we will get them tested right away, then as we've done everywhere including Newark, quarantine folks, do contact tracing of their workforce and things of that nature. So yes, everybody that wants to operate in the months ahead, I think, is going to have to do a lot of that.

Well, I've just participated on the broader group calls. And of course, as you mentioned a moment ago, we are right on the frontlines of it. I think the two things that have quite frankly allowed the United States and, to a degree, Europe to be more resilient than people thought was just what we're doing right now: modern communications. Our IT group, which is fantastic under normal circumstances, just did incredible things by moving thousands of people to work from home. And so now I use Microsoft Teams or Zoom or FaceTime every day two or three times. And now I think the second thing that has allowed us to go forward is the enormous amount of home delivery that we're providing, and UPS and Amazon, because that's allowed people to live a remarkably unchanged life except for those social things we talked about a minute ago like going out to dinner or going to the movies or something like that. So that's why I'm a bit more optimistic perhaps than other people are because we're seeing that economic activity at a very high level continue.

Well, of course, this, as you mentioned, is the fourth, but it is probably the most contentious in terms of a political issue. Early on, we participated in the, I mean, it was the second bill which had a lot of support for airlines that actually had funds available for all-cargo operations. The CARES Act, fortunately, we did not have to avail ourselves of that. We had plenty of credit available to us and clearly we're managing our cash flows carefully. We were right in the middle of a major aircraft modernization program which created some issues for us, but our CFO and treasurer, we made a debt offering. And so now you get to the point, just as you said, where the biggest issue in this next act is what goes to the states. And there you've got all kinds of political fireworks that I would be crazy to get in the middle of despite your kind invitation to do so.

Don't know that I do. I tell you, I admire them. They've done great work, particularly our governor here in Tennessee, Governor Lee's doing a good job.

Well, I think it's a necessary evil, but it's Keynesian economics on steroids, that's for sure. But at the end of the day, the business of America is business, as a former president one time said. That's where all the income comes from. So I'm more optimistic that you'll see a lot of progress, a lot of entrepreneurship and inventions. Things come across my desk every day, it's amazing, people that have come up with new products and they're trying to sell FedEx. And so I think that you've got lots of contentious issues like the postal service and IP. I think people forget at great peril that what really made the world wealthy from the end of World War II was opening markets and invention and innovation. But opening markets led by the United States. And now the protectionism that we have in this country and the mercantilism that China's demonstrated in the last few years, that to me is the most dangerous thing, to get that back in control and recognize that trade is what made the world much richer in 2020 than it was at the end of World War II.

Well, we've been in China 35 years. Last week alone we probably flew 250 to 300 flights in and out of China. China constitutes about almost 40% of the world's manufacturing today. What was happening before COVID-19 is most Western companies were bifurcating their supply chains so that they had one supply chain inside China for the enormous market of a billion four hundred million people, but they were diversifying their supply chains outside of China to Vietnam, Southeast Asia, Eastern Europe. Of course, in this country we did USMCA and we have a significant amount of our supply chain based in Mexico and in China. So I think it's important as we come out of COVID-19 that whether they can execute exactly on the trade deal that was done or not, that the effort be there on both sides to recognize how important this economic relationship has been to mutual prosperity. And of course, we're very much in favor of re-embracing the TPP and the trade agreements with Europe because I think Europe and the United States has to have a bigger marketplace with people from those regions of the world to match up to the internal marketplace of China with a billion 400 million people.

Well, there's no question about that. And I think China to some degree has not helped itself with these wolf warrior diplomatic initiatives and things of that nature. But on the other side of the coin, I think at the end of the day when people just really look at it objectively, China will recognize that what made them wealthy was the United States and Europe opening up our markets that allowed them to become such a manufacturing power. So the Chinese want for their citizens what we wanted for our citizens: prosperity, better health. The best way to get that is to get a broader trade agreement rather than to go into another cold war and try to deal with these issues like the South China Sea and so forth diplomatically rather than fighting each other through the media.

Well, I have a couple of experiments going on because they actually did subsidize businesses to retain employment in the airline industry. So they're keeping people that clearly do not have enough work to do and come October there'll be another tranche of assistance to the airlines. On the other side of the coin, as you just mentioned, most of the money has gone to people who have become unemployed. And as many of the Republicans mentioned at the time of the CARES Act, that would be an incentive for people not to come back to work. We've hired tens and tens of thousands of people and I think to some degree that's correct. But the level of unemployment is so great today, I don't think it's a strategic issue. We've got great people out there on the road, they're just heroes. I get emails and talk to people every day that are just so appreciative of all of our employees. Lots of vignettes and social media of what our people are doing out there every day. And so I think that the unemployment issue may keep us from getting, I mean, the payments that you just mentioned might make people reluctant to come back, be a package hauler someplace in certain locations, but overall not that big a deal.

Prolifically. Prolifically. Bringing in our FedEx Ground unit, which is the one that does most of the B2C, about 4,000 drivers a week. So if you want to come work for us, we'll be glad to take you on.

Well, that was a very big issue early on. We worked with our pilots and the ALPA to come up with a protocol. Again, we followed all the CDC, WHO, and FAA guidelines. One of the most important things I think that happened was actually the second wave of COVID-19 infections in China because they became extremely aggressive on testing pilots. I mean, very aggressive. So we were able to get a small number of the Abbott ID NOW devices from the task force and we placed them in strategic locations. So we actually test our pilots, which takes about 15 minutes, before they go into China. And we have changed, I think, the confidence that our folks have going in and made their families feel better about it. And most importantly, it made the Chinese feel differently about our pilots transiting there. And we have done things that almost are unbelievable in terms of trying to sanitize the airplanes and the vehicles and the operating centers in China. So that's how we've dealt with the issue.

Well, we've had a very long relationship with the Postal Service and to some degree you might call it a coopetition. We transport in our Express system almost all of the Priority Mail airport to airport. Postal folks pick it up, give it to us, we transport it and that's delivered on the other end. That's how you get today Priority Mail on the other side. On the other side of the coin, they've had this service where they incent you to give them packages at the post office. That service is called Parcel Select and we and UPS and Amazon in particular have used that in years past. We announced about a year ago now that we would bring that in-house for the simple reason we can do it cheaper than what the Postal Service charges us. So the problem with the public's understanding of the Postal Service is that they say we're making money on packages but we're losing $77 billion, which is what they have lost, and a big part of that's our post-retirement health care. But it misses the point. The Postal Service is like an airplane and there are some pilots and there's the first class and there's the economy class. So what they say is we're making a fortune on our first-class passengers, that's the package business, but we're losing a tremendous amount in our economy class. And by the way, we're going to not charge the first-class passengers anything for the pilots, we're going to put that all on the economy class. So it's one network, it's one plane. And as the mail bill gets digitized, just as your newspaper is now digitally offered, as we talked about before the show, in which I read every day, just as that digitization is taking place in the news business, it is ripping out the heart of the Postal Service by taking the mail that pays for them to make these stops. So if you want to look at it that you're making a lot of money in the first-class business on the plane, you can say I'm making money in the package business. That's why the President says if you look at it holistically, they're not charging enough for the package business. But it's the same plane, it's the same network, and it's digitization that's causing the problem.

I don't think it will be much of an issue to us one way or another. As I just mentioned to you, their Parcel Select service, which is where you take volumes of packages to the Postal Service, our service was called SmartPost. We delivered it to 22,000 post offices and then they delivered it to home. Now it's cheaper for FedEx Ground to do that ourselves. To have those short haul on the Priority Mail business, the Postal Service has a very good package business there and I don't think that whether they raise it a bit one way or another would be material to us because we carry it on a wholesale basis.

Well, because of our home situation, I basically have stayed close. My house is about five minutes from where I'm talking to you from. We've got a little farm that has no purpose in the world other than to glue the world together. We go down there on the weekend some and I do Microsoft Teams and Zooms. And thank goodness we're able to talk to our children and grandchildren through FaceTime. And that's been our world for the last two months. It's our frontline folks that are the heroes out there. I can tell you they are the ones delivering those packages to your home.