FedEx: “Forget Q3”

FedEx reported net income in its fiscal third quarter up 10.8% to $562 million, as revenue rose 18.5% to $15.00 billion. Reported operating income was also up strongly (18.6%) to $1.03 billion.

Great results, right?

Well, yes, and no. Because, as has become almost usual with financial reports in our industry, the picture changes dramatically if one takes into account the impacts of various one-time charges or benefits in the current and comparison quarters.

In this case, after adjusting for the costs of the acquisition of TNT last year, as well as for a sharp jump in the price of fuel and the impact of one fewer working days in this year’s quarter, FedEx’s third-quarter net income was down 7.7%, rather than up 10.8%; and operating income fell 3.5% rather than being up 18.6%.

So, that’s bad, right?

Well, again, yes and no. Perhaps the best way to sum it up is in the words of FedEx CFO Alan Graf, speaking to financial analysts during a conference call: “If I were you guys, I would forget Q3.”

Mr Graf, and other FedEx executives, made it clear that while there were financial bumps in the road in the quarter, operational results were strong, and that their optimism for the long term was unchanged.

Regarding the operational results, as can be seen in the charts, average daily package volumes and per-package yields were up in both the Express and Ground segments, although operating income declined (primarily due to a sharp rise in fuel price and one fewer operating day).

Turning back to the TNT integration, during the post-results conference call, Mr Graf summed it up this way: “In the nine months following close, we learned a great deal more about the TNT business. The business we acquired was severely under-invested, particularly in IT and in operations which is driving additional investments. Furthermore, prior to the acquisition, TNT announced a restructuring program with numerous initiatives to improve the business.” As a result, he said FedEx had upped its forecast for integration-and restructuring-related spending in the current fiscal year from $50 million to $300 million. However, while this hit the 3Q results particularly hard, Mr Graf said FedEx expected total integration costs over the remainder of the planned four-year period to be lower.

And, he added, FedEx expected operating income in the Express segment to increase between $1.2 billion and $1.5 billion in fiscal year 2020 (the fourth year of the integration) over final fiscal year 2017 adjusted results.

The full transcript of call is available on Seeking Alpha, and is worth reading, but here are a couple of other highlights:

FedEx’s view of e-commerce: “The vast majority of the volume that we carry at FedEx Corporation is business to business, and while e-commerce is the fastest-growing piece, it’s the smallest piece. And secondarily, as we discussed many times and we can discuss that at infinitum, we can’t afford the same capital intensity for peak e-commerce volume, which is why we have been backing away from some customers and raising our prices significantly.”

The fate of TNT’s Liege air hub:  “It’s critical to our success [in Europe}. It goes alongside of our Cologne hub and our CDG hub, and we will operate all three hubs there. It’s very effective for us to have all three hub operations in Europe.”

On Amazon as a potential disruptor of the express business: According to Fred Smith, “85 percent plus of our business has nothing to do with e-commerce. Amazon is a wonderful company and they certainly have revolutionized the e-commerce world. We’re not sure what Amazon is going to do, one way or another, but the FedEx system that consists of thousands of facilities and the ability to pick up transport and deliver in one to two business days between any two addresses in the United States has been decades in the making, and we think that we do not have a great risk of being disrupted. We obviously are putting a lot of effort into making sure that there is no opportunity for somebody to disrupt us on a substantial scale.”

“I think people focus on e-commerce because everybody looks at this from their mobile phone forward, while the real story is everything behind the mobile phone. And that’s what FedEx has in enormous quantities: airplanes, trucks, facility, team members.”

While FedEx may view e-commerce as a mere fraction of its business, on a global scale there is no doubt that e-commerce shipments are thirsty for air freight capacity to meet demand for express delivery. Those interested in learning more about this subject should join us at Cargo Facts Asia in Shanghai, 25 – 26 April, where senior executives from ATSG, DHL Express, and YTO Express will participate in a session titled “The Impact of e-Commerce on Air Freight & Express.” For more information, or to register, go to CargoFactsAsia.com.