Consultant Insight: Opportunities outweigh current costs at FedEx Express

Labor issues impacted profitability for FedEx’s Express division, weighing on the company’s recent earnings announcement. However, optimism for international growth is high. [caption id="attachment_69752" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] For FedEx’s fiscal first quarter ending Aug. 31, operating income fell 20.1% to $567 million from $710 million for the same period last year. Still, the recent quarter’s operating income was much better than the fiscal Q1 2020 period ending Aug. 31, 2019, when operating income was $285 million. Salaries and employee benefits and purchased transportation were the two biggest expenses for the division, with salaries and employee benefits increasing 9.1% year over year as the company raised wages and hired new workers. Purchased transportation was used to redirect cargo to better-staffed facilities, increasing 18.9% YoY. “We estimated $60 million in incremental air network costs due to the impact of COVID restrictions on our operations, including limitations on layover, supplemental crews to ensure service continuity and immigration restrictions,” said FedEx Chief Financial Officer Mike Lenz. Despite the decrease in profitability, Express revenue increased 13.7% for the quarter to $10.96 billion compared to $9.65 billion a year ago. Revenue per freight pound for the International Priority service increased 5.7% to $2.04 compared to $1.93 a year ago, and 7.8% to $0.55 for the International Economy service. Higher revenue was achieved per package with International Priority service increasing 5.2% to $56.64 and International Economy service increasing 7.7% to $39.10. Meanwhile, average daily volume increased 10.9% for International Priority service and 1.2% for International Economy service. FedEx noted continued recovery in its international segment thanks to a shift from ocean freight to air cargo as its customers replenish stock levels in time for the peak holiday sales season. As a result, six previously ad hoc intercontinental flights — four trans-Pacific and two on Asia-Europe routes — were put into scheduled service to provide more capacity. “When we think about our international business, our largest growth opportunity is Europe,” Brie Carere, FedEx executive vice president and chief marketing and communications officer, told analysts. Carere outlined three lines of business that are important to FedEx Express, including: Intra-Europe, as demonstrated by the 2016 acquisition of TNT to help grow cross-border business; e-commerce within Europe, as well as from Europe to the U.S.; and Europe to Asia. Carere further noted that e-commerce growth is critical for its Asian and European businesses. As such, FedEx International Connect Plus (FICP) , which was introduced earlier this year, was expanded from Europe to six new global destinations, increasing coverage to 82% of global GDP across a total of 300 lanes. According to Carere, FICP helps FedEx Express improve its global competitiveness. “It's got quick transit times that has very different features and service for last mile,” Carere said. “It allows us to lower our cost to serve because the features on last-mile delivery was a lot more like the Ground domestic network.” The outlook FedEx remains bullish on the international market. It is forecasting air cargo market valuation to exceed $80 billion by 2025. Currently, Carere said that FedEx has a single-digit market share, which presents a “significant growth opportunity” for the company to pursue. FedEx Express will not only continue to expand and enhance its FICP product, but it will also add a one- to three-day time-definite international service through its FedEx International Priority Express service, in which customers will be able to schedule delivery by noon to select destinations. In addition, FedEx Express will take advantage of the limited capacity the market continues to experience. FedEx expects air cargo capacity to remain constrained through at least the first half of 2022, with full recovery not expected until 2024. “Capacity on international lanes remain scarce and we have seen European and APAC export demand recover to pre-pandemic levels,” Carere told analysts.

Consultant Insight: Opportunities outweigh current costs at FedEx Express

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