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FedEx CEO Fred Smith Sees Hybrids as Central to the Nation’s Energy Future

CEO Watch recently caught up with Fred Smith, founder and CEO of Federal Express, a $39 billion enterprise that had its origins, in part, as an economic thesis that got a C grade from a professor who argued that few people would pay a premium to have a package delivered the following day. And yet …

CEO Watch recently caught up with Fred Smith, founder and CEO of Federal Express, a $39 billion enterprise that had its origins, in part, as an economic thesis that got a C grade from a professor who argued that few people would pay a premium to have a package delivered the following day. And yet today FedEx moves a mind boggling 8 million packages each day to every corner of the globe.

Given that energy is a significant component of FedEx’s overall business cost-the company runs over 670 aircraft and about 80,000 trucks and vehicles, and consumes 1.3 billion gallons of jet fuel a year and is the largest user of energy in the world after the U.S. military-Smith knows a thing or two about the importance that energy plays in our economy and, perhaps more important, how critical it will be to our economic recovery. He chairs an industry group, The Energy Security Leadership Council, which came up with a detailed report recommending how best to diversify energy supplies while increasing fuel efficiency. With U.S. dependence on foreign oil a subject of national debate in the Presidential election, CE went to Memphis to ask him how both the government and industry can take steps to put the country on a more secure energy footing going forward. (The complete interview can be seen on Chief Executive’s CEO Casts on its website www.chiefexecutive.net.)  

What’s the central problem with the current energy policy and what should be done to address it?

The petroleum market is not a free market. The U.S. is importing over 60 percent of our daily needs-double the petroleum we imported 30 years ago. Few appreciate that most of the petroleum comes from nationally owned companies. Ninety percent of world oil reserves are, in fact, owned by nationally owned companies, many of whom have interests and policy objectives that are inimical to the U.S. This is not just an economic issue; it’s a national security issue.

At FedEx we burn over 1.3 billion gallons of jet fuel a year-the U.S. Air Force burns about 2.5 billion gallons. Because we also use several hundreds of thousands of gallons of diesel fuel for our ground vehicles we take this issue very seriously. Our view about energy dependence is straightforward. We believe in using available technology that would significantly reduce imported petroleum. For example, the lithium ion battery technology developed over the last 30 years for the IT and telecommunications industry is now ready for use in commercial vehicles. It can provide a 40- to 50-mile range on a single charge using a small gasoline engine that serves as a generator to extend the total range of the vehicle to about 400 to 450 miles. The equivalent total mileage is about 150 miles per gallon.

In addition, the recharging cycle is getting faster. Automaker CEOs tell me that in the next five years it will be down to less than one hour and in those stations with high voltage it could be down to 10 minutes. The good news is that the electrical distribution system is already in place. We all have electric outlets in our garages. Retailers and gas stations could easily have recharge outlets. Any type of power source: solar, nuclear, renewable, geothermal or hydro that makes electricity makes you independent and can transition short haul vehicles from being dependent exclusively on petroleum. Our number one priority is to transition our short haul auto fleet to plug-in hybrid electric vehicles.

The new Chevy Volt and Toyota Prius indicate that this is a viable technology. This is the real solution to reduce our reliance on petroleum on the demand side.

On the production side, we should maximize oil production in our coastal waters and in Alaska. Remember that every barrel of oil is fungible. This is not just an energy risk but a national security risk as we saw last summer when oil went to $175 a barrel. While it’s doubtful we could achieve total energy independence, such a move could substantially cut our demand for foreign oil to the point where it would make a difference. 

What policies should the U.S. adopt to advance the use of hybrid power vehicles?

The biggest thing is to recognize that in order to get these automobiles such as I describe into the hands of the public, we’ll have to help the auto manufacturers transition the manufacturing base because it’s a huge upfront capital investment to do so, and until such vehicles can be produced at scale it will require some sort of tax incentive or rebate from the government to get there. But the money is there. We’re just spending it in our national defense budget or in our national balance of payments. People don’t recognize that half our balance of payments deficit is spent on petroleum, so if we reduce petroleum imports, we reduce our national balance of payments deficit.

The critical component is the conversion of our manufacturing base to produce these vehicles and incentives to buy them. Let me give you an example at FedEx. We along with Eaton Corp. and the Environmental Defense Fund developed a hybrid electric pick-up truck. It’s about 700 cubic feet, the kind you can step in and out of. These big vehicles are now passing 2.1 million miles in our fleet. We have 300 of them, and we’ll be ordering more. But because these are not yet produced at scale they cost 50 percent more than the conventional diesel vehicle they compete with. But they burn 42 percent less fuel and have 90 percent fewer emissions. So with the twin problems of energy dependence and CO2 emissions, this technology is twofer! 

Is it your plan to convert most of your 80,000-vehicle fleet to this hybrid technology, and if so, what is the projected savings once this conversion is complete?

Unless it’s required by a regulation like California‘s, you can’t as a commercial operator like FedEx put yourself at a commercial disadvantage. We can’t buy vehicles that cost 50 percent more than the competing diesel vehicles if you have a negative rate of return because it will show up as a cost that we would be forced to put in the prices we pass along to customers. Now when diesel fuel reaches $5 to $6 a gallon it gets close to achieving a ROI even with that capital delta. At scale, they shouldn’t cost any more than a diesel powered vehicle, and at that point we would likely convert a substantial portion of our fleet to the new plug-in hybrid technology. 

T. Boone Pickens wants to solve the energy crisis by building windmill farms-lots of them-and by converting 20 percent of the nation’s surface transport to using compressed natural gas (CNG). In this, he is joined by Chesapeake CEO Aubrey McClendon who argues in TV ads just like Pickens that CNG is safe, cheap and abundant. But is such a scheme realistic? What would the costs be, political as well as economic? And do you think such an effort would work?

We need to produce electric power from as many sources as possible provided that they are economic. Assuming that wind can produce power cost-effectively and in ways that do not penalize the communities that have the windmill farms, it should be considered. However, as I understand it, having windmill farms on a large scale requires a much more efficient national grid than we now have in order to move this power across the country efficiently. Where I differ with Mr. Pickens is the use of natural gas for short haul transportation versus using hybrid electric vehicles. This doesn’t make a lot of sense to me because you have to build a whole new infrastructure in order to distribute the natural gas. We already have an electrical grid that could be improved to accommodate hybrids. It would make more sense to use natural gas to generate electricity. It would be expensive to set up a natural gas distribution system to tens of millions of private vehicles across the country. It would make more sense to install such a distribution system for long-haul over-the-road trucks and delivery vehicles that rely on fewer refueling locations.

About JP Donlon

JP Donlon is the Editor-in-Chief of Chief Executive magazine.