I want to welcome everyone to Memphis and the FedEx Corporation's 2012 Investors and Lenders Meeting. I hope you thoroughly enjoyed the facility tours today and seeing the FedEx team and technology in action. Thank you to all of our friends in the investment community, banking and insurance, rating agencies, and media for joining us tonight. You probably noticed the different colors of lanyards everyone is wearing. Just to let you know, there's a code. The sell side analysts are wearing red lanyards. The buy side institutions are wearing green. The bankers, rating agencies, and insurance folks are in purple, a nd the media have black lanyards, and the FedEx employees have gray. T hat way, you'll be able to tell the different groups.
J ust like I do with conference calls, I'd like to remind everyone that FedEx Corporation desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act. Our first speaker tonight will be Fred Smith, Chairman and CEO at FedEx, followed by Rob Carter, our Chief Information Officer, who will speak after Fred. Then we'll open the floor to questions, where Fred will moderate. To ask a question, please write it on a note card or raise your hand. For our live webcast audience, feel free to ask a question via email or as a message on StockTwits.com. For email, please include your full name and contact information with your question and send it to ir@fedex.com address. To send a question via StockTwits.com, please be sure to include the $FDX in the message. Preference will be given to inquiries of a long-term strategic nature.
Now, please welcome Fred Smith.
Thank you. Well, good evening. I hope none of you have heart problems. If you didn't before tonight, you might now. I'd like to compliment the staff of the Hilton and the chef. Those of you who don't know Memphis, one of the biggest things that happens around here is every May, the Memphis Barbecue Fest, where scores and scores of teams from all over the North American continent come to compete. Rob Carter, who you're going to hear from in a few moments, is the captain of one of those teams. I think before they put a ringer on it two years ago, he came in dead last. The Hilton Hotel chef, I understand, came in third, and that's a very big deal, so hopefully, you enjoyed the dinner. But we appreciate your coming to the 2012 FedEx Investors and Lenders Meeting.
On behalf of our board of directors, our Strategic Management Committee, all of whom you'll hear from over the course of the next 24 hours, and our 300,000 team members around the world, let me express our appreciation for your interest in our company. During this meeting, we intend to transform the interest you've showed by coming here, and the confidence in the FedEx strategy and our ability to achieve our financial goals. Let me make one, a somewhat bittersweet announcement before I get into the main part of my formal remarks. I need to announce tonight that my old business partner and an important member of the Strategic Management Committee, Dave Rebholz, has told the board at our last meeting a couple of weeks ago that he'll be retiring effective May 31st, 2013.
Dave had the very good sense to recently marry a lovely lady that's about twice as smart as he is, and I think he has aspirations of buying a house down on the beach and living a well-deserved life of relaxation. I urged him not to do it and tried to talk him out of it, all to no avail, so we'll see how long that beach watching lasts. But there's no individual in the history of FedEx who's contributed more to this company's success. I think those of you who follow FedEx and the truly spectacular growth and performance of FedEx Ground will agree with me that he has been a great leader and a great CEO of that business. I hope you'll join me in a round of appreciation for Dave.
Back to business, and you'll hear a lot more from Dave tomorrow and a couple of other senior officers from FedEx Ground. But let's start with the basics for the whole corporation. As you can see from the very first line of the FedEx mission statement, we understand clearly our job is to produce outstanding financial results. Last fiscal year, we did just that. Our revenues grew by 9%, and our earnings per share by 40%. Cash was up 22%, and return on invested capital was 11.9%, compared to 9.2% the previous fiscal year. We did not achieve our goal of 10% operating margins, but we did reach 7.5%, so 10% is certainly within our sights.
Over the next several years, we're confident we can grow revenues, increase earnings and margins, and increase cash flow and returns on invested capital. We also know many of our shareowners, and that includes me, would appreciate higher dividends in the years to come, and we intend to do that as well. In addition to the earnings growth we've seen at FedEx Ground and FedEx Freight, we intend to improve annual profitability substantially in our FedEx Express segment, assuming reasonable economic conditions in major markets around the world. We're revamping the FedEx Express cost structure through a combination of cost reductions, efficiency improvements, and service repositioning. Now, Dave Bronczek, the President and CEO of FedEx Express, will cover the various programs in place to achieve this goal, but it's important to note we'll begin to achieve the benefits starting next year.
Our programs across the entire corporation are targeting $1.7 billion in profit improvements by the end of FY 2016, with a significant portion of the benefits achieved by FY 2015. These profit improvement initiatives, importantly, do not include base profit improvements at FedEx Ground and FedEx Freight. Our speakers tomorrow will talk about their operating companies' roles in achieving this number, and Alan Graf, our CFO, will summarize how all of our efforts will achieve that grand total. Now, a very big part of the profit improvement will come from cost reductions in SG&A expenses spread throughout the enterprise, but particularly in FedEx Services and FedEx Express. While we have many cost reduction activities underway, the cloud computing technology revolution will help fuel some of the substantial productivity improvements that will contribute to these savings.
That's why I asked Rob Carter to give a very unique presentation to you this evening, which details these remarkable developments, after which, as Mickey said, I'll field questions to the various SMC members. Rob will follow that up tomorrow and explain to you the great benefits that we'll achieve over the next few years as Project Renewal, as we call it, begins to pay off for FedEx. I should note that Project Renewal and its component parts, and Rob will describe these in some detail tomorrow, Platinum Core, Purple Core, and Multi-Core, represent the largest cross-OpCo project FedEx has ever done. It's been underway for several years, and its benefits to FedEx will be profound.
In short, it's the improved productivity resulting from activities such as Project Renewal that will allow us to reduce fixed headcount by several thousand people per the voluntary buyout program we announced in August. From a broad perspective, I think FedEx has a number of important competitive advantages, which augur well for the long-term earning power of our company. Before I detail these competitive advantages, let me unequivocally state our commitment in all our operations to safety above all, and providing maximum security for our customer shipments, the public, and our team members. We're also committed to being responsible corporate citizens and adhering to the highest standards of corporate governance and ethical conduct. The first advantage is our strategy to compete collectively, operate independently, and manage collaboratively. It's unique, very well thought out, and profitable.
It allows our operating companies to bring laser-like focus to the market segments they serve while benefiting from the trusted FedEx brand and the scale of a $43 billion enterprise. Thus, FedEx Express's commitment to global, time-certain deliveries is complemented by the flexible, low-cost FedEx Ground system that focuses on day-certain deliveries within the United States and Canada. Ground's small business owner-operator model lets it efficiently meet the needs of the highly cyclical retail sector. Since FedEx Ground schedules don't have to accommodate a national air express network, it has been able to speed up its system. We've reduced transit times by a day in over 70% of our lanes in the last nine years and are faster to more locations than any competitor.
As a result, FedEx Ground and SmartPost have knocked it out of the ballpark in terms of package market share over the last decade, as this slide illustrates. Hence, my great admiration and affection for Dave Rebholz and his team. A s you know, Ground segment profits have increased significantly over this period. Given the network redesign launched in 2011 , FedEx Freight is now coming on strong, with all the advantages of the FedEx services sales force and an increasing presence on our FedEx automation platforms to offer unprecedented ease of use for customers in the LTL sector. Freight now offers not only the fastest transit times for priority shippers, but an economy option when price is a more important considration, all from a single provider.
This has never been successfully done before in the LTL segment, but our FedEx Freight team is executing almost flawlessly, and our customers love it, as you'll hear tomorrow. Our sorting and routing technology is the key element that enables this technology and this unique... the technology enables this unique strategy. Now, it's important for those of you who follow FedEx to realize that we view our companies as a portfolio and manage strategically with that reality in mind. For example, several years ago, we made the decision to grow the FedEx Express systems organically in Europe and China, and to significantly expand FedEx Trade Networks for the commodity air freight and maritime segment. These decisions were a drag on FedEx Express' earnings, but they were more than offset by the profit growth at FedEx Ground and more recently, at FedEx Freight.
In years past, I should note, we funded a lot of the service improvements and network expansion within Ground and Freight through the financial success of FedEx Express. Our board and our strategic management committee are focused on results for the entire corporation, and not the results of a particular segment in any given year, depending on the strategic developments underway. In this respect, we've seen a change in the international air cargo market, as you can see by this important slide. Door-to-door global express, our strongest suit, is taking a bigger share of the overall air cargo market, but the total tonnage in that overall market is not growing.
In addition, the cost of fuel, the lower value per pound of electronics products, which is about a fourth of all air cargo tonnage, and improving sea container services with better customer information systems, are taking some commodity air freight share for the ocean cargo market. The effect of the rise in fuel prices over the last decades, as you can see on this chart, on global supply chains and trading patterns, should not be underestimated. Now, if you'd like to know more about these market changes, I suggest you pick up a copy in the foyer of the Wings Club speech I gave in May, which deals with them. In the short term, the industry trends I just described have been exacerbated by macroeconomic issues in all three of the major trading blocs: Europe, North America, and China, Asia-Pacific.
This has, in turn, been reflected in the reduction of global exports. We recognize these trends and have revised our strategy for FedEx Express to improve its margins over the next few years. Some of the things we've done include our aircraft fleet modernization programs, our substantial expansion of FedEx Trade Networks, and the excellent acquisitions in Mexico and Poland, which will benefit in the years to come from nearshoring economics. We also recently completed important deals in France and Brazil. Dave Bronczek and Mike Ducker will cover all of these and other FedEx Express issues in their presentations tomorrow. Our second advantage is the superior competitive positions we enjoy in the various segments served by our core operating companies. These strengths stand tall in the marketplace and are very, very hard to duplicate.
Our main focus within FedEx Express has been to strengthen the significant competitive advantage we've developed recently through big technological upgrades, a broader array of service options, and the unparalleled Express Freighter network and Super Express Freighter network we've deployed around the world, particularly those routes based on our long-range 777 freighter aircraft. In this vein, we began two additional Super Ex or Super Freighter Express Freighter routes this fall, giving our customers in Taiwan and northern Italy unprecedented cut-off times. As I explained earlier, this same competitive advantage and differentiation is reflected by FedEx Ground and FedEx Freight relative to their competitors. In all of our segments, we're very focused on improving margins and ROIC. Our third advantage is the distinctive FedEx culture, a demonstrable benefit in the marketplace.
Ask any FedEx team member to tell you what the Purple Promise is, and I'll bet he or she will say, "I will make every FedEx experience outstanding." Our People-Service-Profit, or PSP philosophy, is an integral part of providing the motivated team members essential for the delivery of the Purple Promise to our customers. According to Professor Emeritus James Heskett of the Harvard Business School, half the difference in operating profit between organizations can be attributed to effective cultures. I'm absolutely convinced that's the case at FedEx, and we appreciate the efforts of our team members to deliver the Purple Promise every day in every transaction. If you'd like to read some wonderful above-and-beyond stories about these teammates meeting the Purple Promise, check out the Purple Promise Award winner information on the table in the foyer. Our Quality-Driven Management system, or QDM, is a fourth FedEx advantage.
QDM has allowed us, year after year, to improve the quality of our services, despite the fact that we've grown to be a behemoth since our original quality management system was put in place decades ago. Most companies see a deterioration of quality when they get bigger, but I assure you, our customer service has gotten better and better and will continue to do so. Moreover, as well-known quality gurus Deming and Juran conclusively showed years ago, quality improvements reduce costs, and our own experience has verified this over and over. For example, the QDM team in Brazil improved its clearance process so much, they will add more than $40 million in revenue and savings over the next five years. A FedEx Express dispatch team used QDM to reduce instances of pickups where there was no package ready.
Now, their number of zero package stops has dropped by almost 3,000 a day, or a savings of $2.6 million a year. Process improvements made by FedEx Express air operations teams shortened MD-10 repair times by 35% without compromising safety. This puts planes back in service quicker, saving millions of dollars in maintenance expense. Our QDM system is integrally tied to our service metrics measurements, customer loyalty, and down to the local management's incentive compensation. If you're interested in our QDM program, you can pick up additional information in the foyer about it as well. Advantage number five is our distinctive sales and marketing capabilities, and our efficiencies here give us a leg up. Essentially, we match the right sales talent to each customer and bring science to the art of selling.
Mike Glenn will tell you more about the outstanding capabilities of our sales force tomorrow, but simply put, we're able to produce better results with fewer resources due to our use of advanced technology. Mike will also discuss the effect of our sales strategy on our yield improvements and share of market. It's good news all around and ample proof of our comparative capabilities within these important functions. Our overall strategy is closely tied to effective yield management. We want FedEx Express to focus on high yield, day-certain, long-distance shipping, particularly international, while FedEx Ground and Freight provide best-in-class service for items that can meet customer requirements via surface transport. The key is striking the right balance between volume and yield improvements. But with slow economic growth, as I mentioned previously, the cost reduction programs, which we will describe in detail tomorrow, are also essential to achieving our financial goals.
Six, as Rob will tell you, and as numerous third-party accolades have confirmed, our technology capabilities are a dynamic advantage. Because we've always believed the information about the shipment is as important as the shipment itself, we've been on a nonstop journey to give customers the best information possible. With it, they can make good decisions about their entire supply chain or a single shipment. Remember, our couriers were the first to use handheld computers. We were the first to market with online package processing and package tracking, both of which are taken for granted now throughout the transport and logistics sectors. We're part of a larger trend of innovation and technology that, according to McKinsey & Company, will drive some two-thirds of all future productivity growth. That's the core of the effects Project Renewal is having on FedEx.
Let me give you a few examples of some of these over the last several years as we ramp up to the full rollout of the Renewal benefits. five years ago, the FedEx TechConnect customer service team had 16 call centers. Because of FedEx IT technology, we've been able to transition 8 of those call centers to customer service reps who work from home. That's a 50% savings on facility operations and increased job satisfaction for these very important team members. FedEx Ground now uses a laser technology to measure package dimensions. With those measurements, Ground can load trailers with less air space and more packages. The result is 7 million fewer line haul miles driven a year and 1.2 million fewer gallons of fuel consumed.
ROADS is a FedEx Express program that uses scans and label devices to allow for more efficient pickup and delivery routes of time-certain shipments. Over the past two years, the ROADS project has saved FedEx Express about $33 million a year, with much more to come. As the rollout continues, this amount will significantly increase. Our final advantage is the strong balance sheet and significant earnings we've built over many years. It gives us the capability to exploit our competitive advantages and to weather economic adversity. It allows us to modernize our vehicles and aircraft fleet out of cash flow, which will significantly add to earnings in the years to come. Tomorrow, in the last presentation, Alan Graf will highlight the financial strengths that derive from that strong balance sheet. But let me reiterate our commitment to improving our financial performance and our returns to shareholders.
In summary, by the end of this meeting, you will have a better understanding of how we'll reach these goals. By the time we get to the final questions and answers tomorrow, our executives will have given you a lot of information to ponder, and we'll be glad to discuss any points which we have not made clear up to that time. We're confident that through the key advantages that I just listed and the ongoing application of technology and quality-driven management, we'll deliver the financial performance to ensure the near and long-term success of FedEx. Due to the advantages and strategic initiatives I mentioned, we believe we can do this even in a low-growth environment for global trade and low-growth environments within the major economies. In short, our competitive advantages will allow us to continue to take share in our three major segments.
Now I'd like to introduce Rob Carter, who has been recognized as a top CIO by various tech publications, and last year was named to Fortune's Executive Dream Team as its CIO. Rob will talk about some fascinating IT trends transforming businesses overall, and FedEx in particular, quicker than you can say nanotechnology. When he finishes, I'll come back up and moderate a question and answer section for our SMC. Thanks for your attention. Rob, you're up.
Well, good afternoon. Good evening. What am I saying, good afternoon? One of the hardest things to do ever is follow your boss, and especially when you have to correct him right off the bat. See, the Cadillac Grillz BBQ team didn't come in dead last. We came in 102nd place out of 105 teams. T he fact that three of those teams were disqualified didn't really, you know, factor into that too much. But it's, y ou know, it really is an interesting time here in Memphis to enjoy barbecue and enjoy the flavors that Memphis has, and I hope you enjoyed it tonight. You may be wondering, you know, why is the technology guy jumping up here on the first night of the investor and lenders meeting? What is the idea of, you know, putting this guy up there?
Well, I, I kidded with Dave Rebholz that my streak of not being asked questions on the quarterly earnings call is now officially longer than his, than his growth trajectory over the last decade. I'm just going to inflict you all with technology twice over the next two days. But the whole idea of this story and the whole idea of talking about the Four Horsemen is the reality that, what is it about firms that keeps them relevant over time? I've got a slide up here in front of you that shows firm mortality and this kind of cliff that seems to happen, especially when technology revolution is taking place. What is that cliff? What is the thing that happens dynamically in marketplaces that causes firms to consolidate and collapse and markets to align at such a significant pace?
I would argue that that's one of the most interesting engineering terms that seldom ever gets talked about, and that's the dominant design is a fascinating story about how technologies align and how revolutions align, and I hope tonight you'll get some insights. I want to ask your permission to pull back just a little bit from the details of our business and look at these macro trends, and look at how they not only affect the world that we're operating in, but our business directly as well. These are big trends that are impacting the world, they're impacting the way that we interact with the world, and they're impacting our business. I think they're impacting all the businesses that you follow out there.
But the dominant design is not one that really just starts with a technology story. It starts with all kinds of revolutions in the industrial world. This interesting locomotive that's up here in this picture is called the gauge-changing locomotive. It's actually capable of operating on three different gauges of the railroad, and it's something that you don't see much anymore. Well, the reality of the rail and the way that the rail revolution began to affect the world is that in the early days of the rail, there were lots of different gauges of the railroad. Everybody didn't operate on the same gauge of the railroad.
In fact, there were eight primary gauges of the railroad that existed out there, and the Norfolk Southern and the Illinois Central and the Santa Fe and the Burlington Northern all operated on different gauges of the railroad. They all had competitive reasons that they thought their gauge was the right gauge. In fact, it wasn't until President Lincoln came along in a very interesting time in our company's history and passed the Pacific Railroad Act of 1863. Now, 1863 was a really interesting year in our country's history. Most of us recognize that that's right at the outbreak of the Civil War. Well, a lot of us don't remember, though, that everyone remembers that Lincoln was a lawyer, but many of us don't recognize that Lincoln was a railroad lawyer.
Most of his business, most of the things he was interested in, had to do with rail rights-of-way, with moving the rail forward, and in particular, getting the transcontinental railway built. He believed that if we could connect the East and the West in this country, that we would have significant competitive advantage in bringing the natural resources of our country together. But it took a huge effort in order to settle on that, and there was massive fighting and lobbying, and this was actually a war of the gauges of the railroad. The reality is that this law did not get passed until nearly the outbreak of the Civil War, because the Southern delegates were not coming to Congress at that point in time and couldn't voice their opposition to this.
What this meant to the Norfolk Southern was that they had to plow up every mile of railroad that they had out there and move it six inches out. Well, to them, that looked like chaos. It looked like folly. It looked like: Why would we ever want to make that kind of capital investment just to get to a standard like this? But the reality is, is as we all know today, looking back dominant design event, that this is something that made our country competitive for the last 150 years. The integrated rail systems that tied together the East and the West, and the North and the South, and the Northeast and the Southwest, gave us competitive advantages through the Industrial Revolution, through the wars that we faced, through so many different things.
It was a fascinating dominant design, and how when you're looking dominant design, what you see is chaos, what you see is competition. But when you look dominant design events, you see the advantages that they bring to you. The rail is not the only good example here in this dominant design. the War of C urrents that took place around electricity. You know, today, we come into a hotel like this, and we fully expect that, of course, you know, we know what the plug is going to look like in our room. But back in the day, when the electrical networks were propagating themselves, it was a huge battle over the type of currency and the type of plug that would allow us to interface with those things. Companies were competing.
The Edison Company and the Westinghouse Company were at war with each other about what the most appropriate way to distribute electricity around this country were. Edison believed in direct current. Westinghouse and Tesla believed that alternating current would better serve the rural areas of our country. It was much easier to distribute it around to the rural areas and allow us to develop and grow around the world, as an economic powerhouse. Well, you know, that was in the face of a world that looked a lot like this. I think everybody recognizes what this chart is. It's the international plug chart. What if we'd actually had in this country to carry around a chart like that, as opposed to having the unified infrastructure of electricity that we come to know and trust today?
This was something that today we take for granted as we look back dominant design event, but as it was happening, it was something that was just a competitive mayhem that existed out there. All of these things are really about what these revolutions are that cause significant consolidation of industries and significant mortality in firms. What I would like to tell you today is that across the array of technologies, across the array of technologies that we deploy into our business, that we interface with our customers, that all of the companies that you follow have out there, there are dominant design events that are taking place that are going to shape the future of technology.
These are things that, as we look forward at them, look like chaos, look like competitive alternatives in technologies, but as we look back on them, are going to look like significant unifying and empowering capabilities that came forward. The server world is where we're where we'll start with the Four Horsemen. Servers are really interesting, and, you know, we've all lived through the eras of mainframes and all different kinds of servers that are out there, but let's talk about what's really going on in the server space today. You probably heard this riddle as a kid, and the riddle went something like this: Which would you rather have? Would you rather have a penny that doubles every day for the 30 days of a month, or would you rather have $1 million? Now, as a kid, it was a pretty easy choice.
You said, "Well, give me the $1 million. I'm, I'm ready to go." But I think as we sit here, you know, many of you financial analysts and, and, you know, understanding the power of the 2 to the N phenomenon, what happens with the doubling effect, know that the answer is probably not the $1 million. But what, what is that penny worth after 30 days? Well, the reality is, is on that 30th day, that doubling is worth $5 million, right at $5 million. I t's a significant advantage to have chosen that doubling over the $1 million. Rob, what does that have to do with servers? Why, why are servers relevant to this 2 to the N phenomenon? Well, as we sit here today, we are in the 19th generation of Moore's Law. Most of you have heard about Moore's Law.
It's the, it's the proposition that Gordon Moore, the founder of Intel, put out there and said, "CPU power, the power of processors, is going to fundamentally double every 18-24 months." W here, where does that put us in this doubling phenomenon? Well, today, we are in day 19 of that doubling phenomenon. The six-core i7 is the 19th generation of that architecture. But what does that mean if we put it back in the context of the riddle? Let's take a look at this. Well, the 19th day in the kid's riddle was only worth $5,000. You know, and as a kid, you were probably sitting there most of the way through the month going, "Hmm, I wonder if I made the right choice.
"It's day 19, end of the month is in sight, and I've only got $5,000, and all my buddies are laughing at me because they've got $1 million." But you see what the curve does, what 2 to the N does. And even in Intel's public roadmap, it's extraordinary where this curve goes. It continues to shoot up and to the right with capacity that takes us into the billions of transistors on a single processor over the next few years alone. The power and capacity of this model is simply extraordinary, and there's no end in sight. The physics are there, and the science is there to prove out the fact that this doubling is going to continue to take place.
But many of us in the technology business know that, in fact, it's not just a single processor that's being doubled anymore, it's our ability to harness them in large clusters, large arrays of these Intel processors that we put together into big data centers. H ere's what that looks like for us. T his is a FedEx-specific part of that story. O n your left in the picture is, is a picture of our legacy data center. This is a data center that's being shut down rapidly, but what you can see there is many different gauges of the railroad. You see purple boxes, white boxes, black boxes, gray boxes, silver boxes, and they were all there for a reason. They all had competitive advantages at the time. They were all competing for our technology spin.
However, what you see on the right is the new enterprise data center. That's where rows and rows of these Intel servers live completely consistently and harnessed together in big clusters of compute power that allow us not to operate separate gauges of the railroad and gauge-changing locomotives in order to deliver technology, but big, wide arrays of this technology. Now, what's maybe most interesting about this, and what really makes dominant design, isn't the fact that FedEx chose this technology, it's that without attributing any of these pictures to any of the companies, if you look at Facebook's data center, if you look at Google's data center, if you look at Amazon's data center, if you look at Salesforce.com's data center, public images of what their arrays look like, you'll notice a significant similarity to what we're deploying.
This dominant design effect of servers, and it really doesn't stop there. These are all different pictures of different data centers that all look alike today. Now, legacy companies with decades of technology like ours have the challenge and the problem of needing to relieve themselves of the burden of some of that technology investment over the years. But new technology companies would never dream of making investments in anything other than this platform. This is the way technology will look in data centers for years to come. W hat this horseman we call is scale-out x86, the scale-out Intel environments that are part of what we're delivering as part of our capabilities here inside the company. Let's move on to networks. Networks are an interesting story as well.
In my career alone, I've been at this about 30 years, and what I did was I collected the network protocols that I could think of that I had worked with. Now, I know, you know, you guys are transportation analysts and going, "God, do we really? Do we have to talk about network protocols tonight?" Well, the reality is, is that the early days of enterprise computing and the early days of computing had many different gauges of the railroad with regard to how we deployed network technology, many different gauges of the railroad. But one of these is not like the others. One of these has emerged dominant design, and it's and it really just jumps off the page at you when you bring it forward.
All of the computing platforms today, from the ones in your back pocket or your coat pocket to the ones that run in those big clusters in those data centers, all talk the Internet protocols. Internet protocol is the way computers talk to each other from our mobile devices, all the way through to the largest arrays of computers today. Now, the world looks very different today with regard to how these technologies allow us to connect. The world is lit up with fiber optic technology and capability that allows us to connect in the world. But it doesn't even stop there. It doesn't stop with the wires that are out there. It's also, as we look down, you know, on the... That's the Hilton here in Memphis. What you see is what I call the eyedropper effect of wireless technologies.
Many of you, as analysts, used to come to events like this, and you would, the first thing you would do is look for a jack to plug into. You know, hopefully, we had set up some way for you to connect your computers. Today, that thought doesn't even cross your mind. The eyedropper effect allows us to fill in all the white spaces around all that network that's been put out there and have constant connectivity wherever we go. G uess what? The curves of the performance on these technologies also has a 2 to the N effect. The unbelievable capacity of wave division multiplexing and fiber optic technology that allows you to continuously fracture the spectrum of light and move more bandwidth across it, is just going, once again, straight up and to the right. The capacity, speed, and performance.
You know, many of us can jump into the way-back machine and go all the way back to the mid-1990s, you know, long ago in history, and we remember, you know, dialing up and making a 1,200 baud connection and keeping our fingers crossed, you know, while the modems rattled back and forth, and we hoped, you know, and then it got to 9,600 baud and 14.4, and 28.8, we were in heaven. Now, we wouldn't even dream of that being satisfactory. In fact, not just the wire side technologies, but the wireless technologies are moving up at that same curve. Most of us now are getting to take advantage of LTE networks out there on the wireless side that are giving us capacity in the wireless space. That's just extraordinary.
This phenomenon out there in the network world is called pervasive IP. Pervasive Internet Protocols and incredible bandwidth increases that are allowing us to be constantly connected. Over this past year, I've been in Vietnam and Malaysia and India and Kuala, you know, Kuala Lumpur and Europe and everywhere else, and never once did I worry about or wonder whether I would have connectivity. In fact, when I pulled out my iPhone or my BlackBerry or whatever I was traveling with at the time, I could always make the connectivity. It's pervasive and becoming more so in the world. The third horseman is storage. Storage is pretty interesting, too. Guess what? We're dominant design in storage as well. All these inflection points and these core technologies are driving the way that all businesses will operate in the future.
Y ou know, once again, when I started as an operator in college, I was hanging tapes in the data center, and I remember thinking how incredible that was. But today, we look at the capabilities, you know, that far surpass what we even saw on the hard disks that are out there and how that works. T, his is an intriguing quote. I, I can't attest to its accuracy, but, you know, it seems like it's about true. Eric Schmidt said in 2010 that from the dawn of civilization to that current time, that there was a 5 EB accumulation of recorded information on the planet. Now, we record that much information every two days on the planet. Now, I can attest to the fact that not all of that information is useful.
I've got an 18-year-old daughter who manages to run out of unlimited texting. I don't know how you do that, but I did the math on it one time, and it was stunning how often she seemed to be texting. I said, "Do you sleep, sweetheart?" S he wouldn't answer me. But, you know, the reality is this data is accumulating at such an incredible pace, and the growth of these platforms are even more stunning than the others. Now, in this 1956 picture on the left here, you see the very first hard drive by IBM, which was 5 MB. Now, it took a whole air freighter to move that.
We may still wish that it took a whole air freighter to move a disk drive in our business, but the reality is that a microSD card, about the size of your pinky fingernail today, the current standard is 128 GB—the current high-end standard for that is 128 GB. That represents a 17 million-fold increase in the amount of storage on any given surface area inside of storage devices. This is an unbelievable escalation. N ot only that, but the boundaries between what we traditionally called storage and what we call memory are really beginning to blur.
When you look at this flash technology, and you see some of the big data center implementations of it, like on the right there, what you see is literally hundreds of terabytes of information in very small boxes with no moving parts, with no spinning medium or moving heads to crash, and it operates as fast as the memory, what we call memory inside of our computers. Now, when I started this, memory was that very precious, volatile resource, you know, that you had to shunt everything out to disk drives and tapes and storage to protect. We're moving into a world where there's very little difference between memory and storage. Memory is becoming very non-volatile, and we have huge arrays of very high-performance memory.
These NAND producers today, that produce these little SD cards and thumb drives and things, will send out more than 1 billion of those devices this year alone. And the average device that we pull off the shelf will have 38 GB of storage built into it. All these arrays of storage, whether they're in your back pocket or off in data centers, are really the persistence of memory. Persistent memory and the way that we're able to access massive amounts of data very rapidly through these fast networks and large clusters of servers, really completes the first of the three horsemen. Now, the fourth horseman is actually the most complicated of the four, and it's software. Software is tricky business. You know, and software is what keeps me up at night, but it's really an interesting story of what's going on in software as well.
I'm going to ask you to jump in the way-back machine one more time and go all the way back to the year 2000 and remember what was going on in the music industry in 2000, a mere 12 years ago. It was absolute chaos out there. The digital music revolution was taking place. Every college dorm in the country had, you know, peer-to-peer servers out there, Grokster and Napster and LimeWire and LiveWire, and, you know, everybody was suing everybody. Radiohead was suing the music labels, and the music labels were suing consumers that were stealing music. Well, an interesting thing. A friend of mine, a guy named Scott Dinsdale, was actually the CIO at Sony BMG at that point in time. Scott was a larger-than-life guy, looked a lot like Ted Nugent, and he looked like he belonged, and he had big ponytail.
Scott was elected by the music industry as the head of the Digital Rights Management Consortium. The idea was to pull together all of these competing factions and figure out how to solve this melee that was going on in digital rights management and, and all of this. Well, Scott took that on. H e was a bold guy, and he jumped in there with both feet, and two years later, he quit and moved to Jamaica and started a rum company. O n his way out the door, he said, "This sucks." That's what he said. He's like, "Nobody, you know, nobody can do anything in here, you know? I mean, it's just unsolvable, the complexity and the factions that are at work here." Y ou know, that's a true story.
But then something happened right on the heels of that, and some of you may already anticipate, you know, what this next clip brings to the picture. But it brings something called a tune for $0.99. Tune for $0.99 showed up in the midst of that mayhem, and things began to organize around it. Consumers began to have a trusted way that they could go out and get music. It felt like their karma was a little bit better because maybe they were paying somebody for it instead of stealing it. They weren't getting viruses on their computer. There was only one thing you could do at that time that was more likely to give you a virus than, you know, than getting music.
W e won't go there tonight, but, you know, I mean, the reality was, this was, you know, this was a solution set to something that looked unsolvable. It was a crazy, you know, it was a crazy world, but, you know, it not only solved the consumer problem, it solved the record label problem, it solved the artist problems. Artists like Metallica and Radiohead that hated the labels were able to self-produce, and they put their stuff out there. The record labels still had value to some of the artists, so the back-end infrastructures were there in this core offering as well. We also all know that this didn't just stay music. It turned into books, it turned into TV shows, it turned into movies, it turned into all kinds of things that were served up by that same piece of infrastructure.
It was an extraordinary transformation and this, and the last of the horsemen is actually something that, you know, I don't want you to glaze over too much, but it's service-oriented a rchitecture. It's the ability to take software and turn it into services that you can stand up, that people can tap into. T he way that the world is working now is that when you, when you look out there across all of these horsemen, when you look at big arrays of servers, when you look at big arrays of disk drives, when you look at massive networks, and when you look at software services, you begin to see them to come, you know, coming together in unique mashups, that come together more and more versatility in what you can offer out there.
Ladies and gentlemen, what the main thing that I wanted to tell you about this tonight is, when you hear people talk about cloud computing, that's what they're talking about. They're talking about these kinds of servers, these kinds of services, these kinds of networks and storage potentials, all being brought together with capabilities that you can tap into in a world that is fundamentally changing the way that the world will work. It is a fundamental dominant design. enterprise computing is only 35 years old. You know, when we look out at businesses like ours, we started right at the beginning of the era of companies that automated themselves with technology. Prior to the mid-1970s, computers were for accounting and a little bit of scientific and payroll.
It wasn't until we rolled into the late 1970s and early 1980s that companies really began to automate themselves end-to-end with technology, and we did that with lots of different gauges of the railroad. Now, had you chosen to be a company that was located on one of the cities that opted out of the four-foot 8.5 gauge railroad, not only did the city become irrelevant, but it's likely that your business did as well. This is about what keeps companies relevant, and choosing the gauge of the railroad, being ready dominant design shift, is a very significant driver for companies that will thrive going forward in this world. The horsemen come together in a, in a unique way to present cloud computing. It's the essence of the architecture that is the backdrop for everything that Fred talked about.
I'll argue that as the CEOs come up tomorrow and talk about their businesses and their, and their parts of the business, they'll talk about technology as well. Technology undergirds almost everything we do in this business. I have the dream job in getting to work for Fred and getting to deliver technology with... Many of my great business partners are out here in the room today that help, help me do that, and we have a fantastic team. But the reality is, is these technologies are gonna let us do it more efficiently, with a lot more agility than we ever could in the past. Fred mentioned the cores.
The Purple Core at the top is our customer core, how we've built systems that uniquely represent the brands of FedEx in a way that customers see as purple, allow them to interact with all of our operating companies seamlessly. The Platinum Core at the center are the infrastructures and technologies and architectures that allow us to do this stuff seamlessly. The Multi-Core at the bottom are the ways that we serve the uniqueness of the operating companies and the uniqueness of the fact that Dave Bronczek has an airline, and Brian Phillips has a print and office and content business, and we have to deliver different capabilities into those businesses.
W e built this, and I'll spend a lot more time talking about the specifics at FedEx tomorrow, about how these things are driving cost out of our business, how it's allowing us to be much more agile. And the reality is, we have a choice. We can either keep our multi-gauge locomotive in place. And, you know, one of the problems that the Germans found during World War II with their multi-gauge locomotives, as they were trying to navigate the European continent, was they broke down a lot. They weren't resilient, they weren't reliable, they were complex. But the reality is, dominant design, building out the infrastructure and capabilities of this company on the common gauge of the railroad, is gonna allow us to be nimble, agile, and flexible for the future. H opefully, you found...
You know, I think that this, this reality dominant design events are, are really important, not just to our business, but to all the businesses that are willing to adopt these technologies. W ith that, I'm gonna bring Fred back up, but thank you for your attention after dinner. Enjoy.
Rob's given that presentation to a number of audiences around the world, and among other reasons, I think you see why he was named to that Fortune Dream Team CIO position. Tomorrow, as you hear the presentations from the OpCo CEOs and the other senior management, I hope you'll remember the remarks that Rob just made, because I think you'll see why this tremendous project that's been underway here for several years is just about to really provide tremendous payoffs for us. As I mentioned in my prepared remarks, we'll be able to take out, through these voluntary buyouts, thousands of fixed heads that are now managing these discrete systems that will move to cloud computing accessed across the enterprise, with much less requirement for the overhead costs that we've had to bear, given the genealogy of the company.
That's in addition to direct labor personnel that are managed through volume management issues and facilities and so forth. They're not affected directly by this technology, but indirectly because of the productivity enhancements like ROADS at FedEx Express and Project Vision at FedEx Ground, and some of the other things you'll hear about tomorrow. Now, I'm happy to open up the questions for any audience member. Let me. We got some over the internet. Several of them are Express specific, and I think what I'll do is I'll hand them to Dave Bronczek tonight and ask you to cover them tomorrow because they're sort of generic. But here's one for Alan Graf: Will we see a stock split in the near future? He's not even getting up .
No.
No. Q uestion here. Okay. Go ahead.
Yeah. Tom Wadewitz from J.P. Morgan. I wondered if you could give us some... You put out a very large number for operating income improvement at Express. Can you give us some of the thoughts behind...
For the corporation?
For the corporation, sorry. Can you give us some thoughts around how much of that is cost side versus revenue? W hat do you think the big execution risks would be to, you know, the overall program you've laid out?
Well, I think without spoiling the presentations tomorrow, Dave Bronczek is going to go through that in specific, specific detail. The vast majority of the $1.7 billion benefit is from cost reductions, but we'll talk in detail about it tomorrow. He'll give you by category. Risk?
Yeah.
Well, as I said in my prepared remarks, as long as there's any kind of a reasonable economic environment, in other words, all bets are off if you start talking about a significant recession or contraction, you've got a different, a different issue there. Right behind you is our very esteemed economist, Gene Huang, who's the president of the National Association of Business Economists, and I read in detail his last report before I came up here today, and he's not predicting a recession at this point. Right, Gene? A ssuming, you know, even a low growth environment, we believe that we can execute on it just as we did with FedEx Ground and FedEx Freight, with the programs you're going to see tomorrow. Yeah. I'll sort of move around here.
Thank you. Bill Greene, Morgan Stanley. Fred, last time we had the investor meeting, you had a very good, specific answer to some of the landscape challenges that were out there, as well as, let's say, sort of eminent opportunities. Now that competitive landscape has changed since then a bit. C an you talk a little bit about the corporation's appetite for maybe more strategic moves? There might be some opportunities with the UPS-TNT transaction that some assets become available. How important would Europe be in terms of strategic moves, or is this really not something you're going to contemplate right now?
Well, first of all, let me reiterate a long-standing policy. We don't comment on corporate development issues. We have described in some detail, Alan and I both, what our criteria for corporate development activities, and I think you've seen them, and I spoke about some of them tonight. We bought a great company in Mexico. We're very bullish on the NAFTA trades. We're very bullish on the near sourcing issues because of the price of fuel. I showed you in my chart, we bought a wonderful company in Poland. Same type of thing. You can count on the fact there's going to be a lot of production that's moving to Eastern Europe because of the costs of logistic chains. In Europe, we made the decision several years ago to expand organically and to grow FedEx Trade Networks.
You'll see in Dave Bronczek and Mike Ducker's presentation tomorrow, the fantastic expansion that we have there. We plan to be a very formidable force in Europe, but you've got to remember, the competitive landscape is not the same as it is in the United States. There are more competitors there, domestically and domestically and cross-border. Now, one of the three criteria that we use in corporate development analysis, and I can assure you, our CFO is very vocal about this at the Strategic Management Committee. You know, you've got to buy something that makes you some money. I mean, there's no sense in going out and buying something that doesn't make you money.
W hen we look at make or buy, types of decisions, we do it in relation to what does it mean for the shareowners, and we're very confident that the plan we have in Europe is a good one. Jerry Leary, our President of, of Europe, is here. Some of you can talk to them. We're doing extremely well in Europe, and, I'm very confident we'll continue to do well in Europe. Yeah.
Should I just go? Hey, Fred, over here.
Fred, on the cost-cutting side, can you comment on if the structural changes impact the service delivery times? T hen, can you also comment if it includes kind of the potential of a U.S. Postal Service contract impact as you look into 2013?
Well, the plans that we have underway to reduce fixed heads and SG&A expenses and improve the productivity in Express have no diminution in service whatsoever. Quite the contrary, we're actually going to be able to improve service levels, and Dave Bronczek, in his presentation, specifically gives you a couple of examples of that. T here absolutely is no diminution in service. In fact, this technology and our QDM system is improving service as we speak. What was the other part of it? Oh, the Postal Service contract. Well, Dave, you want to comment on the Postal Service contract tonight? That's a big issue, and might as well make sure that nobody goes to bed agitated about that.
Well, we've enjoyed a great relationship with the Post Office for 11 years now, and we're in the middle of going through their contract proposal that they've given to us last week. We have great service for them. They appreciate our service, but we are very confident that we will be the successful bidder once again. You probably came in last night, you saw our day turn here. W e know what it takes to win the contract. We know what they're looking for, we know who we're up against, and we're very confident that we'll prevail.
One over here, I think. Yep, right there.
Chris Ceraso at Credit Suisse. This is kind of directed at Rob and yourself. I was fascinated by the presentation and the multi-gauge railroad, and it seems like you might have somewhat of that happening in-house with the Ground and Express kind of side-by-side networks. Is there a technology solution or something that will allow you to simplify that network and grow the productivity of those two networks?
Well, one of the big differences between UPS and FedEx, and this has been something that a lot of people have commented on over the years, and you just indicated by your question that you feel the same way. You think that it makes most sense to put Express and Ground parcels together. We strongly disagree with that. UPS has always looked at the business as if it's a package business. We've always looked at it as a business that has express package requirements and lower value-added transactions which require a different network. P robably the best example is that tonight you had a very nice dinner of ribs and barbecue and so forth. T his, if you went and bought it commercially, is in a restaurant that doesn't have candles, it doesn't have liveried waiters.
They bring you out the food, and it has a certain price point. Most people would not then say, "Well, you ought to have a back room where you have white tablecloths and solicitous waiters, and you serve foie gras and, you know, baked Alaska." It's very logical to you that in a business like restaurants, you have different segments. But when it comes to the package business, people think, "Well, gee, it makes more sense to put them together." The reason we have taken 20-something market share points and are confident that we can continue to take market share points in the Ground business, is because it's not combined with an Express business.
We've been able to speed up our networks and automate our ground handling equipment, which would have been impossible had we made the compromises necessary to accommodate the arrival of a 757 into Des Moines to coordinate with that Ground package network. What I think has not worked as well for us is the strategy that we've been pursuing in Express, which, quite frankly, was working splendidly until the great meltdown and the rise in fuel prices. We were up to close to 10% margins in the Express business. As I mentioned in my remarks, and you're gonna hear in great detail from Dave, Mike Ducker, Mike Glenn, and Raj Subramaniam, the market has changed, and so we've had to change our strategy in the Express business.
Now, some of the things that people have, I don't think, quite locked on to the extent that, that, they should have, with what we've done, was the 767 deal. Not only was that a fabulous deal for us and Boeing in replacing our MD-10s, it reflected our recognition that the international marketplace was not gonna grow as fast as we had thought a few years ago, so we moved the 777s out. W e're very confident that our Compete Collectively strategy will continue to allow us to take market share in both segments. The margins in Ground are industry-leading. They're almost 20%. Right, Dave? You're gonna get those before you leave here, unless you know what you promised with. They're almost 20%, and the return on invested capital is fabulous.
Now, what we have to do is, through the execution of this, of the strategy in Express, is to get those returns so our aggregate ROIC and margins are up where we want them to be. But we don't think that putting the two networks together makes a lot of sense. I would point out one other thing. A lot of what UPS does is a lot more like us than you realize. They have squadrons of part-time air express drivers, as they call them, that are required to meet their 10:30 A.M. and First O vernight, as we call it, delivery commitments.
T he fantastic performance of FedEx Ground, which we think is gonna continue for a long time to come because of its competitive advantages, we think our strategy is a better strategy, assuming we get Express with its new strategies, as opposed to what we were doing several years ago. Unfortunately, the Express company is a very big business, with a lot of equipment and facilities and so forth. T urning that thing into the new strategy has been a time-consuming issue. But I think in the next few years, as Dave will describe to you tomorrow, we have a pretty good handle on it. We're very confident we can execute against that plan the same way we did at Ground and Freight. Yeah?
Hey, Fred, Justin Yagerman at Deutsche Bank. Along those lines, just curious how you're thinking about your line haul within Express. You guys have a lot of planes, as we all saw today. You know, the idea that every FedEx package needs to be on a FedEx plane is something that I think UPS would probably challenge in the way that they run their line haul. Do you guys think about getting more nimble and differentiating service a bit more than you have? And in that, do you think that there's room for further deferrals with the 767s now of 777s, as you look out over the next decade?
Well, no, I think the 767, 777 mix is about right. I mean, after, I think, next year, we're only taking a couple of 777s a year, and the payoff with the 767s, as Dave will describe to you tomorrow, is outstanding. High ROI, big improvements in profitability, so I don't... I think we've got that about right. T he other issue was? Oh, third party. Well, look, that pyramid that I put up, I don't think you can... If you could pull it up, those three pyramids, Raj is gonna show you this again tomorrow. UPS bought several major forwarders. They bought Emery. They bought, what else, Alan? Fritz, Fritz? Fritz, and one other. Hmm?
Menlo.
Menlo. T hey have a very big forwarding operation. O f the ton miles that UPS moves under the UPS banner, they have much more stuff that's moved on other people's airplanes. Well, as I mentioned in my prepared remarks, and subject to those criteria on the corporate development thing, we looked at whether we wanted to buy a big forwarder. We came to the conclusion that you essentially were buying people, customer relationships, and the information systems, and we decided to build it. I think you'll hear tomorrow, the fantastic growth of FedEx Trade Networks, which is on a meteoric rise, just reflects the difference in our ability, that we'd rather do it from scratch, just like we're doing in Europe. I mean, we looked at build and buy everywhere.
T he answer to your question in short terms is, yes, there will be more tonnage that will be moved, particularly ocean tonnage, on FedEx Trade Network, because that's what the market is telling us that they want. Yeah. Yeah. F irst one you can get, and then this gentleman.
Am I up? Yep, Art Hatfield, Raymond James. Just the comments that you made...
Raymond James?
Yes, things have changed.
Used to be Morgan Keegan, headquartered in Memphis. Now it's in Tampa. I was down there for the Redskins game at Raymond James Stadium.
Did y'all win?
One point in the last minute. Thank God for that young kicker. He would've had to hitchhike home if he hadn't have made that one. Go ahead.
All right. T hat being said, everything you just said about the line haul and the cost reductions, anything in here that changes your thought process or your approach to how you deal with the pilots going forward in upcoming contract negotiations?
Well, listen, our pilots are very, very valued members of the FedEx team. How many of them do we have, Dave? Huh?
43,000 .
We got a lot of retirements coming up. We're hiring hundreds of them to replace them. We have, lots of, lots of expansion. As you'll see in the comments by Mike Glenn or Raj Subramaniam, tomorrow, we have taken, Raj, what is it? Four market share points in terms of revenue among the three big integrators? Five? Four. Four points. T he intercontinental air system is, in FedEx Express, is going to continue to grow. H opefully, we will be able to come up with a, a productive, contract with the pilots. Now, bear in mind that we got lots of competition out there. It's not just the integrators, although DHL has a big air operation, they just subcontract it to Polar, Southern Air, Lufthansa. Jerry, what's the name of that company? AeroLogic? AeroLogic.
They're operating airplanes, too. We have to be competitive, but I don't think that hopefully won't be an issue. Right there.
Oh, hi, David Vernon with Bernstein. I'm trying to understand, how do you... if we're talking about $1.7 billion of cost reduction from the back office, not a lot of changes to service level, what about this package is gonna address the strategic sort of headwind to growth that you're seeing in the domestic Express business, which is basically customers trading down, slower service, lower service? H ow do you position the company to address that sort of shrinking market going forward?
Well, first of all, let me get the exact quote, "Shrinking, going down, going down, going down." Was that it? Three goings down? Oh, okay. W e don't think that that's quite the, quite the state of the marketplace. A big part of the reduction in the, Express business has been the document traffic that has been diverted to electronics. The facts of the matter are, as you get a bigger share in the ground parcel business, you get a bigger share in the fat, luscious brown boxes in the Express business that remains. Second, as we've tried to say over and over again, the capacity in the U.S. air system over the last 10 years has been increasingly used to move international traffic, not domestic traffic.
I think in Raj's presentation, he points out that 60% of the Express business touches the United States, either inbound and outbound. T he Express business's future, as it has been for a decade, is in the intercontinental market. But we do not think that the Express business is gonna shrink, you know, to 500,000 pieces or 1 million pieces or so forth. It's just not gonna be a significant growth business. W ith those provisos, the Express business can hit its financial goals, and Dave will talk to you about the details of how we do that tomorrow. But it isn't a declining market. It's just a no-growth environment with some diversion to technological changes.
Plus, every package that we can divert, because that's what satisfies the customer's requirement, is an 18% margin ground package, which we're glad to have. That answer your question?
For the last several quarters coming out of the recession, right? So what do you think changes then? Do you think that a healthier economy reverses the trade-down that we're seeing, or what ends up turning that change in customer behavior back to positive?
Well, let's look at a pure competitor, UPS. I'm not 100% sure, so somebody from marketing, jump in here and help me. But UPS has how many ground packages per day, normal day? 11 million. And they have how many total Air Express packages per day, Mike Glenn? Raj? What is it? I meant... No. Let me get one from my guys, okay, Satish. Mike or Raj, what's the daily express volume of UPS total? Isn't it about 1.8 million, 2 million? Huh?
Two million.
Two million. Okay. W hat's our ground and SmartPost package level now, Dave Bronczek, I mean, Dave Rebholz. Total, just normal day today. 5.8 million. UPS has 11 million, 1.9-2 million express packages. We got 2.5 million express packages and the ground packages. We're gonna continue to take market share in the ground business. That we're pretty confident of. We've done it now for 51 straight quarters. T here is a certain percentage of the packages that move, that need to be moved in a time-definite way. We don't think that the express market, as I said, is going to shrink to oblivion. It's just not a growth market. Does that better describe it? Yep.
I think we've got time for about one more question.
Well, we got two here, and I'm gonna say, don't shortchange them. You're... Mickey, you're a tough man. Go ahead.
Thanks, Fred. Dave Ross with Stifel Nicolaus. Can you talk about trends you're seeing in the B2C e-commerce marketplace, you know, say, over the next five years, and how FedEx's network is, you know, well positioned, you know, to capture any changes that may be going on, specifically with, you know, large competitors like Amazon or maybe competitors below the surface that we're not seeing yet?
You think Amazon's a competitor?
Not a competitor, but, you know, it...
Some people do. That's why I was asking the question.
E-commerce competitor and maybe potential competitor if they chose to do transportation on their own.
Well, yeah, I was gonna say, I'm gonna ask Mike to step in on this or somebody in on his team. But let me just say this about e-commerce. E-commerce is a business where you have to be careful. It's a little bit about... I was on the board of directors of the Mayo Clinic, and if we took over 42% of our practice when I was on that board in Medicare, about three percentage points absolutely wrecked you. And e-commerce is the same way. Residential deliveries are not nearly as productive as commercial deliveries.
Y ou have to manage e-commerce very carefully, and I think our SmartPost solution, that has gotten better and better every year, is, as Rob Carter would call it, a killer app, because it's low cost and the customers really seem to like it. I think there is a limit to the lightweight, residential e-commerce packages that UPS can put into their network that is accretive to their profitability, similar to what the example I gave you with the Mayo Clinic. Mike?
Well, I'll hit this a lot more tomorrow, but e-commerce is a significant growth opportunity for the industry. It's growing at about 15%, based upon the last quarterly data, now represents about 9% ± of total retail sales, and we can expect that to continue to increase going forward. The key is what Fred just said, and that is making sure that you get the right product in the right network, because despite the fact that e-commerce companies promote free shipping, shipping is not free. I t's very important not to get seduced by the substantial incremental volume opportunities and become a charitable organization in the process. That's one of the issues that we continually to fight with e-commerce companies, because obviously, they make a lot of money off shipping.
But we also want to make a reasonable amount of money off shipping, too. W e have been very careful about directing e-commerce traffic into the right network. That's why SmartPost has been such a growth engine for us, because it specifically targets lightweight growth opportunities for companies that want to promote free shipping as a marketing tool, and we've been very successful with that. On the contrary, when companies tend to promote express shipping overnight and are looking for lightweight residential delivery, you can lose your shorts on that. W e've been very selective in that regard, in allowing some of that traffic to go to our competitor intentionally, in order to maintain some reasonable margins in a relationship. As I say, I have to remind companies from time to time, we're not a charitable organization.
W e have a terrific portfolio when you consider SmartPost, our home delivery options, complemented with our Express options. But the key to this going forward is finding efficiencies in residential delivery and avoiding those reattempts, and we've got a lot of terrific solutions in that regard, and I'll talk some more about that tomorrow.
There was one more. Is this it? Okay, r ight there.
Thanks. It's Scott Group from Wolfe Trahan. Fred, first, just want to clarify, when you say Express isn't a growing market anymore, are you talking domestically?
Domestic. Domestic.
Okay.
Yep. No, put up that three diamond chart again. Express International is taking a huge amount of share from the commodity air freight business, and it is devolving into more small, discrete, door-to-door shipments. That's why we put up the Express network to begin with. As I mentioned before, the big meltdown, the strategy was really going terrific, but as the price of fuel has gone up and growth has gone down, what people have done is to trade down to the economy segment of it. Now, it's still Express, you know, it's a small shipment moving door to door, but people are willing to trade off two or three days for a lower price. That's probably good from a shareowner standpoint, because it means you have to have less air capacity in the domestic system to move it. It comes across borders and moves in there.
You want to comment about that?
I got this question at the table tonight, so I want to make a comment about what Fred's talking about. Some of you have heard me say this before, but there are three primary issues that are affecting the domestic Express market. One is electronic substitution. You and I exchange information, we largely exchange it with files via the internet. Those things used to go in a FedEx overnight envelope. They now go electronically. Two is a reasonable substitution for some part of the business. We used to have Express Saver, which we still do, but keep in mind that 80% of all of Ground's deliveries are now made in three days or less. S ome customers are looking for a lower price point, willing to take somewhat slower delivery, and so some of that traffic is moving, so there's a reasonable substitute.
On top of that, Ground has just as many scans as Express does today, has money-back guarantee, and has day definite service versus time definite service. The third issue is the change in global manufacturing. A lot of traffic that used to be moved over in bulk, would sit in a warehouse in the U.S., would be picked, packed, and shipped, and moved through the domestic network, has now moved from point of manufacturer to point of consumption. Two of those three things are good things for FedEx. When we see a package shift from Express to Ground, it stays in our network, and we get much higher margins on that and certainly lower capital requirements going forward. The yields on the international traffic are substantially higher than they are than in the domestic system. T hose are the three fundamental factors.
T he growth in volume in the domestic Express business, Fred's right, it's not a growth market from a volume perspective. We are confident, as certainly as economic conditions improve, that we can continue to grow the revenue through effective yield management and working with customers on a portfolio solution. J ust wanted to add that.
Good. Now, there was another part to your question.
Follow-up on both of those. When you think about the $1.7 billion of profit improvement, directionally, how much of that is coming domestically and how much is internationally? T hen if domestic Express isn't really a growth market anymore, does that give you an opportunity to get more aggressive on the pricing side, or do you feel like you have to be less aggressive to make sure that it's not a declining market?
Well, I think the trick is... I'm gonna ask Alan Graf if he'd comment about the first part of that question. The trick, as I said in my remarks, and you'll hear more about this from Mike in his presentation, is to operate with a good balance. We want to continue to improve our yields, but at the same time, we don't want to diminish volumes to any significant degree. I think we've done a pretty good job of that. Now, sometimes we've overshot a little bit here, and sometimes we do this, that, and the other thing, but I think overall, that's the trick.
But at the end of the day, the whole strategy we've been pursuing for a decade is substitute the pickup and delivery capabilities of FedEx Express for door-to-door International Priority and International Economy, time-certain traffic through this global network. A s I said, until the breakdown, the meltdown in 2008, that strategy was working pretty good. We were right up around 10% margins in the express business. Once the financial collapse happened, and the price of fuel kept rising, as you saw in that chart, due to the rise of China, and India, and the BRICS and the success in OPEC in controlling the price, that's created fundamental changes in the international marketplace. But that triangle thing, I cannot stress that triangle. Put it up one more time.
I mean, these are very big markets, and as you see, the one in the middle is the one that's getting squished. The place that we feel that we can play very effectively is in the door-to-door express business, both our IP product line, our IE product line, and the stuff that's commodity air freight, where we put on other people's line haul to fill in that blank, and then the FedEx Trade Networks maritime traffic, which goes into our ground and freight business. W e have a very good strategy. It's the changed circumstances over the last several years that have required us to modify it, and you'll hear a lot more about the details of that tomorrow. Alan, you wanna tie it off?
Well, as Scott and everybody knows, we don't report domestic and international separately. We're not gonna start tonight. But I think tomorrow, you'll see where a lot of this stuff comes from, and you'll get a pretty good idea of where it might be. But as far as giving you a number, you're not gonna get that. Sorry.
Okay. W ell, we have very detailed presentations tomorrow. Tonight, the objective was to set the stage, to give you the broad picture. B y the time we have the Q&A session tomorrow afternoon, hopefully, we will have answered in some detail a lot of the questions that you have. Mickey?
Okay. I saw a lot of people taking notes and everything. Just wanna be sure, tomorrow, we're gonna have notebooks that are gonna have color slides of all the slides that Fred had tonight, and also Rob's slides, so, they'll be in there tomorrow. Also, I wanna remind everybody, out in the foyer are some of those handouts that Fred talked about. I n addition, we did have a press release that went out tonight, and there are copies out in the foyer of that. T omorrow morning, where we had the reception this afternoon, we're gonna start with breakfast at 7:00 A.M., and the presentations will start at 8:00 A.M. here in this room. I look forward to seeing every...