FedEx followed up its very strong fiscal 2015 first quarter with an equally strong second quarter.
The gains were driven by strong operational performance in all three of the company’s reporting segments (Express, Ground, and Freight), as well as by successful implementation of the profit improvement program instituted over a year ago. The impact of the profit improvement program has been significant, and is shown by the increase in operating margin both in the individual segments and for the company overall.
Operating income in FedEx’s core Express segment was up 35.6% to $484 million, despite a relatively modest 2.6% increase in revenue to $7.02 billion. Express operating margin was up 1.7 points to 6.9%. FedEx said the revenue increase was due to higher US domestic package volume and higher international export base revenue, offset by lower fuel surcharges and by exchange rate effects. The big jump in operating income was driven by growth in US Domestic and International Export package revenue, as well as by “cost management related to profit improvement programs, lower pension expense, and a slight net benefit from fuel.” However the gains were partially offset by higher aircraft maintenance expense in the quarter.
Regarding Express volumes, average daily US Overnight Box volume was up almost 10% and Deferred volume rose 8.8%, more than offsetting a 2.4% decrease in Overnight Envelope volume. International Priority volume was up 0.7% and International Economy was up 4.7%, while International Domestic volume rose 2.3%.
It is interesting to compare FedEx’s package volumes with those of UPS. Where FedEx saw a 6% increase in its US overnight package volume, UPS reported a much smaller 1.1% increase in its most recent quarter (ended 30 September). But the situation was reversed for international export packages, with UPS reporting very strong 9.4% volume growth, while FedEx’s international export volumes were up just 2%.
FedEx’s Ground segment reported operating income up 5.9% to $465 million, as revenue rose 7.5% to $3.06 billion. Operating margin was up 0.2 points to a very healthy 15.2%. Demand growth for Ground packages was 4.7%, but this was offset by a 4.3% volume decline in the company’s SmartPost product. FedEx said the Ground volume growth was “driven by growth in both business-to-business and FedEx Home Dleivery services,” while the decline in SmartPost volume was “due to reduction in volume of a major customer.” Per-package yield was up 3.1% for Ground, “due to rate increases and higher residential surcharges.” SmartPost yield was up 7.3% “due to rate increases and improved customer mix.”
The 5.9% increase in operating income in the Ground segment was due to the gains in package volume and per-package revenue, “partially offset by higher network expansion costs, as the company continues to heavily invest in the FedEx Ground and FeEx SmartPost businesses.”
Operating income in the Freight segment climbed 3.9% to $112 million, and operating margin was up 1.3 points to 7.1%. Freight revenue was up 10.5% to $1.59 billion.
Looking ahead, FedEx reaffirmed its positive earnings forecast for FY 2015, with the caveats that the world see continued moderate economic growth, and that the company continued to gain a modest net benefit from fuel.