Consultant Insight: Reality hits FedEx as it announces disappointing Q1 results

[caption id="attachment_69752" align="alignright" width="309"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption]

In a surprise move, FedEx announced preliminary earnings a week ahead of their fiscal 2023 Q1 earnings.

“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.,” said FedEx President and Chief Executive Raj Subramaniam . “We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first-quarter results are below our expectations.”

But will it be too little, too late for FedEx? More importantly, is FedEx willing to address internal issues to right its situation?

Total revenue for Q1 is expected to increase 5.5% to $32.2 billion. However, costs are the problem. Reported company operating income is expected to decline 15% to $1.19 billion compared with the same period last year. Adjusted operating income is expected to drop 17.5% to $1.40 billion year over year.

The problem resides in FedEx’s Express and Ground divisions. “Q1 results were adversely impacted by global volume softness that accelerated in the final weeks of the quarter,” according to the announcement.

“FedEx Express results were particularly impacted by macroeconomic weakness in Asia and service challenges in Europe, leading to a revenue shortfall in this segment of approximately $500 million relative to company forecasts. FedEx Ground revenue was approximately $300 million below company forecasts,” according to the statement. FedEx Express The global market is softening — or perhaps normalizing. Typically, FedEx and UPS will adjust surcharges and/or raise rates to offset changes in the market. UPS has implemented international air surcharges several times in the past few months, with the latest going into effect Sept 25. FedEx, however, has not appeared to have followed this strategy.

Additionally, the ability to flex networks — shifting planes to areas in which they are needed or perhaps not needed — seems to be another of UPS’ strengths. At one time, FedEx was a leader in quickly flexing its network, but it seems to have taken a backseat to UPS, which has made significant investments in its physical network as well as in technology upgrades to support it.

Let’s not forget TNT integration costs. Six years after its acquisition, FedEx finally completed the integration of TNT earlier this year. The intent of the acquisition was to beef up FedEx’s European presence. However, after a crippling cyberattack in 2017, the COVID-19 pandemic and now a weakening European economy is preventing FedEx from financially benefiting from the acquisition. FedEx Ground Turning to FedEx’s Ground division, the company took a page out of UPS’ playbook and started focusing more on profitable volumes. It doesn’t seem to be paying off for the company based on several social media comments. Worst we’ve had issues with FedEx is within the last 1-2 weeks. Seeing package delays all over and just sitting at facilities.

— Jarod Steffes (@jarodsteffes) September 15, 2022 I've been with FedEx for a decade. My daughter was an account manager for them. I switched to UPS this qtr as FedEx ground has gotten horrible. Half the days they don't even pickup

— Doug Miller (@MillerforKeller) September 15, 2022 Indeed, it appears that FedEx’s Ground business model is under attack as one of its largest contractors, Spencer Patton, head of Patton Logistics, demands changes. However, FedEx’s response was to fire the contractor and then sue him. This comes as FedEx has struggled with obtaining employees for its sorting facilities and last-mile routes since the pandemic began.

Last year, the company struggled with additional costs and delays due to not having enough workers . As a result, FedEx invested in several automation upgrades to its facilities that it hoped would result in needing fewer employees. Cost-cutting measures It seems that all the individual issues FedEx has faced over the past few years have finally come together and smacked the company hard in the face.

The company’s stock price nose-dived when it released preliminary earnings late Thursday afternoon, setting itself up for what some believe as an acquisition target. I, however, believe they could become a private company instead. It’s doubtful that the founder, former CEO and now executive chairman Fred Smith would ever agree to sell his company.

To reset the company on the right path, Subramaniam outlined several cost-cutting measures in the company’s announcement: Reduction in flight frequencies and temporarily parking aircraft; Volume-related reductions in labor hours and other linehaul expenses; Consolidation of certain sort operations to drive productivity; Reduction of Sunday operations at a number of FedEx Ground locations; Cancellation of certain planned network capacity and other projects; Deferral of staff hiring; Closure of more than 90 FedEx Office locations; and Identification of five corporate office facilities to be closed, with additional real estate rationalization planning underway. Keep in mind that all of this is happening just ahead of the holiday peak season , which is one of the busiest times for both FedEx and UPS. And because FedEx fired one of its largest Ground contractors, it will need to invest in additional transportation and equipment to ensure the affected areas are covered properly (i.e., more costs).

Another thing to be mindful of is the FedEx Freight division, which was not mentioned in the announcement. Demand for freight transportation has been hot this year, and the smallest of FedEx’s divisions, in terms of revenue, profits and volumes has benefited.

FedEx will report its fiscal 2023 Q1 earnings on Sept 22. I’m sure we’ll hear more about its plans. How UPS responds will be interesting — the company will report its Q2 earnings on Oct 25.