Consultant Insight: FedEx works to right-size Express network

One week after FedEx issued a surprising pre-release for its fiscal Q1 2023 , the company on Thursday officially issued its financial details for the period ending Aug. 31. Total company revenue increased 4.5% quarter over quarter to $23 billion, but total operating income declined 15% QoQ to $1.19 billion on an as-reported basis, and was down 17.4% QoQ to $1.49 billion on an adjusted basis, according to the earnings report. [caption id="attachment_68221" align="alignright" width="326"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] Volumes declined in all three divisions except FedEx Freight, the smallest division in terms of revenue, which reported the strongest gains in positive operating income, up 67% QoQ to $651 million. Meanwhile, FedEx Ground reported operating income was up 3.4% QoQ to $694 million, although volumes dropped 4.4%. The company blamed the decline on a shift from consumer spending on goods to services. Express decline But the biggest disappointment came from its largest division, Express , which reported a 14.8% QoQ decline in operating income to $1.19 billion, despite a 1.5% increase in revenue to $11.1 billion. Average daily volumes declined 11.4%. “We saw a decline in our volumes during the first quarter, which accelerated in the final weeks,” FedEx President and CEO Raj Subramaniam told analysts. “ Our softening volumes in Asia and the U.S. were predominantly due to the economy while the shortfall in Europe was both economic and service related.” As such, the company is readjusting its air network by reducing 11% of pan-Pacific daily frequencies, 9% of transatlantic daily frequencies and 17% of daily frequencies on the lane between Asia and Europe. Within Europe, the company plans to “alter ground network routes” to improve productivity, leading to a reduction of approximately 11% of routes in the U.K. and 12% in Germany, Subramaniam noted. When asked about service-level issues, FedEx Executive Vice President and Chief Customer Officer Brie Carere told analysts that service challenges such as time-definite deliveries occurred in March and were improving through June until they plateaued. “From a service perspective, when we say service issues, specifically what we're talking about is on the Express portfolio within Europe, across the European network is that we are not hitting that time-definite mark at the level that we expect of FedEx,” Carere told analysts. “And so, we need to increase that service commitment there.” Blame it on TNT Even though the overall global market may be declining and shifting to a “normal” state, the culprit of FedEx’s issues rest with the company itself and specifically within the FedEx Express division, which integrated Netherlands-based courier TNT Express in December 2021. “We saw a decline in our volumes during the first quarter, which accelerated in the final weeks,” Subramaniam said in his opening remarks to analysts. Market data suggests that August's global air cargo volumes did not fall off a cliff. After declines of 8% and 9% in air cargo volumes in June and July, respectively, CLIVE noted that August volumes declined at a more modest level of 5% YoY and were down 4% compared to August 2019. In addition, UPS placed an order for eight 767s in August with delivery in 2025, with an additional 767-300BCF entering service in late 2023. The purchase builds on UPS' order for 19 767 freighters in December 2021 . “I can tell you from the outside looking in, TNT seems to have been an unmitigated disaster here that just has been delivering because you guys are coining out European losses again,” Barclays analyst Brandon Oglenski said on the analyst call. Over five years since the acquisition, TNT continues to haunt FedEx . Some FedEx cost reductions are being done within the former TNT’s European and Asian networks, such as the Asia-to-Europe lane and the reduction in ground services in the U.K. and Germany. “There's a portfolio gap that we had in Europe,” Subramaniam told analysts. “We had to fill that portfolio gap. Now, has the integration gone exactly the way we thought it would? No, because we had the cyberattack, we had COVID, we had all kinds of things in the middle. But the integration is now complete, and that part of it is done.” Looking ahead FedEx will need to operate much leaner to achieve consistent profits across all its divisions. When asked on the earnings call if it has the right team in place to accomplish its plan, Subramaniam assured analysts that FedEx does indeed have the right team. However, for FedEx to achieve success it may be necessary to take a page out of UPS’ book and bring in and outsider for a fresh perspective .

Consultant Insight: FedEx works to right-size Express network

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