Consultant Insight: Cost still a factor for FedEx as it expects increased demand

[caption id="attachment_69752" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] FedEx followed Danish logistics provider DSV in suspending its 2020 forecast due to the uncertain global environment caused by the coronavirus pandemic. More companies will likely follow as the pandemic continues. FedEx’s quarterly earnings for the period ending Jan. 31 noted revenue gains across each of its divisions. Average daily volumes were up 10% in the Ground division while Express segment volumes were mixed with average daily domestic volumes down 2%, average daily international export volumes up 2% and no change in international domestic volumes. However, there were sharp declines in operating income in the Express and Ground divisions, which declined by 65% and 39%, respectively. The Freight division, however, reported operating income up 16%. As noted on the earnings call, FedEx’s overall operating results decline was due to a number of factors, among them, “weak global economic conditions, including the impact of the coronavirus pandemic, higher self-insurance accruals, an unfavorable variable compensation comparison, increased FedEx Ground costs from expanded service offerings, the loss of the Amazon business, a continuing mix shift to lower-yielding services and a more competitive pricing environment.” As the focal point of the pandemic shifts away from China, FedEx Express has observed a rebound week over week since the week of March 3. In fact, the group recorded record load factors intra-Asia, especially from its Guangzhou hub. Volumes will likely remain high for the time being, particularly as results from a recent survey by the American Chamber of Commerce in South China found that almost a third of companies in China’s southern manufacturing hub are facing a supply shortage. FedEx Express is carefully managing its pricing and capacity as volumes change and expects demand will stay elevated in Asia. As such it is adjusting its transit times and spot prices for China outbound to manage demand profitability. Switching over to Europe — a region that is changing on an almost hourly basis due to the pandemic — FedEx Express is utilizing the same strategies as in Asia including transit time extensions, dynamic spot price management and peak surcharges for specific lanes and periods of time as needed. On the U.S. domestic front, expansion to seven-day delivery impacted Ground’s operating income. However, the result of this expansion has been speedier deliveries. As highlighted on the earnings call, 16% of FedEx Home Delivery package volume has been accelerated by at least one day. According to FedEx calculations, the result is that more than 72% of Home Delivery volume is delivered in two days or less. The FedEx Express and FedEx Ground partnership in which Ground will transport and deliver select day-definite Express residential packages is expanding in April to Cincinnati, Phoenix, Minneapolis, St. Paul, Newark and Salt Lake City, and will continue to expand to additional locations in the next 12 months. This, combined with bringing most of its hybrid product, SmartPost, in-house from the USPS, is expected to reduce FedEx Ground costs as it zeroes in on e-commerce trade. The company firmly believes it can take market share in not only international trade but also e-commerce. But, it needs to do so profitably. This explains why we are seeing the company reduce capacity, partner with Freightos to assist in dynamic pricing management, and the Express and Ground divisions working together to optimize the last mile and in-housing most of SmartPost. The strategy’s success will depend on the length of time it takes FedEx to reduce costs and whether it can truly take market share from other leaders such as DHL, UPS and Amazon without getting into a price war. The competitive market is growing and in particular we are seeing the rise of Chinese express providers such as SF Express expand into Europe and the U.S. It’s a steep hill for FedEx, but one they firmly believe they can climb.

Consultant Insight: Cost still a factor for FedEx as it expects increased demand

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