Can falling yield be a good thing?

There has been a lot of talk over the last year about falling air freight yields, accompanied by considerable hand-wringing, all to the tune of “Sure, volume is up, but with yields still falling, we’re all doomed!”

Are falling yields something we should worry about? Maybe it’s time to for a re-think.

Late last week FedEx published financial and operational results for its fiscal third quarter. We’ll analyze those results in detail tomorrow, but first, please take a look at this chart, excerpted from FedEx’s 10-Q.

FedEx Express 3QFY15 US Domestic Volume and Yield

FedEx’s Express segment has seen volumes rise nicely in recent quarters, while yield has been steadily falling. But FedEx is quite happy. Why? Because yield calculations are based on revenue, and do not reflect anything about costs, and the bottom line tells a very different story.

In this case, what declining yield shows is that volume was increasing faster than total revenue. And total revenue includes, among other things, fuel surcharges. As the price of fuel falls, so do surcharges, negatively impacting revenue, but not impacting the bottom line because fuel cost was falling.

Here’s what FedEx CFO Alan Graf had to say about it: “In the Express domestic segment, excluding the impact of fuel, we saw yields grow 1.5%.”

This is clearly reflected in a 129% y-o-y increase in overall Express operating income (EBIT), but on a reported basis, the company had to say that Express yield declined.

Of course, we are not saying that falling fuel cost was the only thing that boosted the financial performance of the Express segment, nor that falling yield is a good thing. Rather, we are simply trying to point out that the tendency to focus on yield as an accurate measure of the health of the air freight and express industry (or individual company) is a mistake.

Gain greater insights into macro air cargo trends at Cargo Facts Asia, 21-22 April in Hong Kong. Click here for details.

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