Peak season boosts volumes and costs for FedEx

FedEx reported operating income up 2.6% in the second quarter of its 2017 fiscal year, driven primarily by the inclusion of TNT Express, which added revenues of $1.9 billion during the quarter. The charts at right show FedEx’s results as reported, with net income up 1.3% to $700 million, as overall revenue swelled by 20.0%, to $14.9 billion. Despite higher revenues, costs associated with IT and infrastructure investments, and integration costs from the acquisition of TNT Express held profits down.

Turning to the FedEx Express segment, Express segment operating income as reported was up 2.3% to $636 million. Total US domestic package volume fell slightly (down 1.3%) which was offset by stronger international demand. Overall package volume was up 4.3%.  FedEx’s high-yield product US Overnight Envelope continued to post significant average daily volume increases into this quarter, and was up 4.9%. Composite US Package yields meanwhile were up 2.7%, and International Package yield were up 0.7%.

Turning from the numbers, which are readily apparent in the chart, to some larger issues, during a conference call following publication of the quarterly results, FedEx Chairman and CEO, Fred Smith told investors the company was in the midst of a record peak season, driven primarily by e-commerce demand. Average daily volumes can be nearly double that of a normal business day during peak season, which requires FedEx to plan carefully and add sortation and lift capacity. Smith said the company will be better-equipped to handle this year’s peak because of various infrastructure investments, “The recent opening of 4 major hubs and 19 automated stations year-over-year.” FedEx has also secured external lift during peak season. In August of this year, FedEx signed a five-year contract with Atlas Air Worldwide Holdings, Inc. under which Atlas agreed to operate five 747-400Fs for Fedex beginning around December of each year.

Mike Glenn, president and CEO FedEx Services added, “This surge in demand is driven primarily by a relatively small number of customers. Less than 50 large retail and e-tail customers responsible for the majority of peak demand.”
As interest in e-commerce giant Amazon’s own-controlled logistics network grows, Smith took the call as an opportunity to reiterate that although Fedex is “Committed to being a leader in the e-commerce market, it’s important to recognize that non-e-commerce deliveries to residences and business-to-business traffic represents the vast majority of FedEx Corporation’s estimated $60 billion in FY ‘17 revenues.”

Commenting on FedEx Freight, Alan Graf, EVP and CEO attributed the unit’s higher average daily LTL volumes, and increased revenue as a result of “Freight’s competitive advantage of having the fastest published transit times in the LTL industry” which Graf added, “is driving higher growth in its priority service.”

Although ground package volumes grew slightly, operating income was down “Due to increased rent, depreciation and staffing related to network expansion as well as higher purchased transportation rates” according to Graf.

Returning to the TNT integration, the company said it plans a more comprehensive update in March. Graf did say however, integration and restructuring will continue over the next four years. Last quarter FedEx said it expect the TNT acquisition to be accretive by FY18.