Consultant Insight: FedEx Express’ TNT integration impacted by omicron

Overall, FedEx’s fiscal third quarter, which ended Feb. 28, was a good one, with the company noting that December 2021 was the most profitable December in its history. Nevertheless, the impact omicron variant of COVID-19 was significant during the quarter, and weighed on average daily volumes, which fell year over year during Q3. [caption id="attachment_69752" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] Total revenue was up 10% year-over-year while the operating margin, as reported, was up 0.9 percentage points YoY to 5.6% or up 1.3 percentage points YoY to 6.2%, adjusted. All three of FedEx’s divisions contributed positively to the financial results. FedEx Express reported a 4.8% YoY increase in revenue to $11.3 billion and an operating income increase of 12.3% to $520 million. The group benefited from higher yields, a net fuel benefit and lower variable compensation expense, according to the company’s press release. But, from June 1, 2021, to Feb. 28, 2022, average daily volumes for FedEx Express are down 5.9% year-over-year, with negative impacts from the omicron variant. In January alone, the absentee rate of FedEx Express crew was over 15%, which caused significant flight disruptions . As a result, international economy express freight services and certain U.S. domestic express freight services were temporarily suspended during the quarter. Despite the omicron negative impact, Express continued to benefit from capacity constraints. “Passenger airline capacity is not expected to fully recover to pre-COVID levels until 2024 or even later across our largest global trade lanes,” FedEx Chief Marketing and Communications Officer Brie Carere told analysts during the company’s earnings call on Thursday. Carere further noted that “valet capacity” on trans-Atlantic passenger airlines is expected to recover faster than trans-Pacific. Thanks to U.S. retail inventory replenishment needs, FedEx Express continues to benefit from flights out of Asia. Many retailers have shifted freight from ocean to air to avoid delays due to congestion problems at ports. In addition, the completion of the TNT integration is expected at the end of March — yes, six years after FedEx acquired TNT. Regardless, the company is positive about the benefits of the integrated air system to its customers. By combining the FedEx and TNT air networks, total flights will be reduced to 825. The network’s reach extends to 72 airports — “fewer flights, more airports,” FedEx COO Raj Subramaniam told analysts. Paris’ Charles de Gaulle Airport (CDG) will serve as the main hub for all European and intercontinental flights, while Liege (LGG) will connect specific large European markets. “The logic behind our acquisition of TNT remains sound,” Subramaniam said. “We are closing a portfolio gap because we do not have an intra-European deferred service, and now, we do. We can also now serve Europe in and out on a lower cost structure with this. And we also launched priority timed options. We have noon and end-of-day service, and it gives us flexibility.” Headwinds rising The impending completion of the TNT integration is probably coming with a huge sigh of relief from FedEx executives and the market. However, the Ukraine-Russia war is a potential risk to what FedEx is creating in Europe and beyond the region. Subramaniam noted during the analyst call that FedEx had suspended all services in Ukraine, Russia and Belarus, but that the financial impact was minimal. In addition, FedEx is helping to move relief to Ukraine, and has provided more than $1.5 million in humanitarian aid. As a result of the war, oil prices have become even more erratic. To compensate for the rising fuel prices , FedEx announced it would update its fuel tables for FedEx Express, FedEx Ground and FedEx Freight shipments, effective April 4. The export fuel surcharge will increase 2.5% for international express, and the import fuel surcharge will increase 3.5% for each fuel price level. For the domestic package segment, the increase is 1.75% for each fuel price level, and for domestic freight, the increase is $0.28 per pound for each fuel price level.

Consultant Insight: FedEx Express’ TNT integration impacted by omicron

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