More freighters for FedEx and a solid 4QFY18

Yesterday, along with the release of FedEx’s Q4FY18 financial results, Boeing and FedEx jointly announced an order for twelve 767Fs, and twelve 777Fs in a deal valued at $6.6 billion at list prices. Although the 767Fs represent are a completely new, previously unannounced order, FedEx has long stated in its Stat Book that it planned to take delivery of five 777Fs beyond what Boeing’s order book have shown. Still, an order for 19 freighters is not insignificant. Boeing’s willingness to sell additional 767Fs with near-term production slots should also be noted as an indicator that Boeing will sustain, if not boost the rate at which it produces 767Fs – quite a shift from not long ago, when the company was turning away orders for the 767F.

Moving now to FedEx’s quarterly earnings, the express giant reported revenue up 10.1% y-o-y in its fiscal fourth quarter (ended 31 May) to a record $17.31 billion. Net income for the quarter was $1.13 billion, up 10.5% from $1.02 billion in 4QFY17, and operating income for the quarter was $1.58 billion (compared to a $70 million loss).

As usual, though, the as-reported net and operating income numbers come with a caveat. After adjusting for a variety of one-off factors, such as changes to pension accounting rules and the costs associated with the acquisition in 2016 of TNT, things look somewhat different: Adjusted net income was up 40% to $1.13 billion.

We’ll start with discussion of a few interesting topics that came up during FedEx’s analyst call, and then move onto customary operating and financial figures.

Foremost was concern regarding the trade war between the United States and China. Fred Smith, chairman and CEO, FedEx Corp., started the call by describing trade as a “two-way street,” and reaffirming the company’s support for lower trade barriers. The issue surfaced again during analyst questions, with an inquiry about the potential disruptive impact the dispute could have on global growth. Dave Bronczek, president & COO, FedEx Corp., said, “We believe the global supply chains, especially those of high-value items, are well established and will be very difficult to disrupt.” Should the trans-Pacific trade dispute escalate, however, “It’s relatively easy for us to reposition our networks, really all around the world should any trade patterns evolve,” Bronczek added.

Raj Subramaniam, EVP, chief marketing and communications officer, FedEx Corp., responding to a question of whether US importers were looking to expedite orders ahead of the tariffs, said, “We have not seen any changes from the customer behavior directly related to these new tariffs.” The volumes potentially impacted are quite small, Subramaniam continued: “the commodities in question make up from a very, very small portion of our US-to-China business.”

Regarding FedEx’s scheduled freighter deliveries over the next two fiscal years, there was discussion of whether the deliveries would be used to replace retired aircraft or add capacity. According to the company’s updated Fact Book, FedEx plans to take delivery of thirty-three 767Fs and nine 777Fs by the end of FY20, and will retire thirty-eight aircraft, a mix of MD-11Fs MD-10Fs and A300-600Fs. Bronczek said the retirement schedule was flexible, and implied that some of its older aircraft could be kept in service if strong demand persists. “If we continue to see strong growth like we’re seeing now, we could use them [MD-11Fs] to add capacity. So we can choose to just replace, or we can grow and add to the capacity that we currently have.”

Returning to its financial results FedEx’s Express segment had a very good quarter. Total segment revenue was up 8.8% y-o-y to $9.60 billion, operating income rose 11.5% to $990 million, and operating margin increased 0.2 percentage points to 10.3.

Average daily US domestic package volume rose a slight 1.1%, but we note significant differences by product:

Overnight Box volumes, FedEx Express’ most popular and highest-yielding domestic product, rose 4.6%, Overnight Envelopes were down 2.5%, and Deferred volume was down 1.3%.

Although US domestic volumes were mixed, yields were up across all FedEx Express domestic products. Per-package yield was up 2.0% for Overnight Box, 4.4% for Overnight Envelope, and 3.0% for Deferred.

International Export package volume growth was sluggish, up 0.7%, but per-package yield grew much faster, up 9.6%. International Domestic package volume fell 1.2%, while per-package yield jumped 11.3%.